The Phoenix retail market story: Q&A with Patrick Dempsey

The U.S. Census Bureau declared Phoenix the fifth largest city in the United States. Consistent population and employment growth, in addition to its central location, educated workforce, affordability and desirable climate have made Phoenix one of the most attractive markets in the country. As a result of the pro-business environment, the Phoenix MSA, which includes Mesa and Scottsdale, has added more than 64,000 jobs over the trailing 12 months, representing more than three percent in annual growth. Furthermore, according to future forecasting by Arizona’s Economic and Business Research Center, the overall Arizona economy has continued in 2019 to outpace growth rates nationally.

The Phoenix retail market has seen an increase in both occupancy and rental rates since 2012, and that trend is continuing through 2019. Twenty-seventeen saw the most absorption and delivery this decade, and this year absorption is already more than 1.5 million square feet, according to CoStar. There is also currently a little more than one million square feet of retail space under construction in the major Phoenix retail submarkets. Submarkets like South Buckeye, Queen Creek, South Phoenix, Anthem, Arrowhead and West Phoenix have vacancy rates lower than four percent, and the submarkets in total have an average of 7.1 percent vacancy. 

When it comes to capital markets, fundamentals remain strong but still require extensive investor underwriting. For example, there is a limited willingness to sacrifice quality for yield, trophy assets are increasingly rare and there is growing interest toward a power center acquisition strategy.

But numbers only tell part of the Phoenix retail story. Retail specialist Patrick Dempsey joined JLL's Phoenix office last year to focus on retail investment advisory and capital markets transactions in not only the Phoenix-Mesa-Scottsdale MSA but the entire southwestern United States. Below, he answers questions about the current state of the Phoenix retail market to put the numbers in context.

Q&A with JLL Managing Director Patrick Dempsey

• What is the single most important factor affecting successful retail transactions in Phoenix today? If there is a path to growth in the investment (lease-up, rental growth or development), you have the main ingredient for a successful retail transaction. 
• How does the Phoenix retail market compare to what is happening elsewhere in the country? Phoenix has historically been a boom and then bust market, but, as it turns out, we haven't overbuilt during this current cycle. Supply and demand in Phoenix are balanced, and we still have not seen excessive rental growth. Phoenix is a market where investors can achieve higher yields than they can get in the coastal cities, like San Diego, Los Angeles, San Francisco, Seattle and Portland.
• What is the biggest challenge facing retail owners today? Property owners and investors are concerned about end of cycle risk in addition to the long-term viability of some of the larger format retail concepts. Every property is different, but investors are wary of tenant sales performance and whether rent is above market. This type of environment demands a focus on realistic underwriting assumptions and creative solutions to vacant space. It's important to note that these fears are despite improved retail market fundamentals nationwide.
• What trends do you see driving successful retail in the Phoenix retail market? Successful retail includes entertainment and daily needs users that cause multiple trips to a property like grocery, fitness, coffee shops and restaurants. Esthetics are important, as people want an enjoyable shopping experience.
• Looking forward to 2020, where do you anticipate the market being in the coming year?  The demand for quality retail investments should be strong if the underlying fundamentals match current buyer investment requirements. Investors are looking at an overall return profile based upon the potential of a given property. As overall vacancy rates continue to decline, we should see continued increases in retail rental rates which helps to bolster property values. It is also important to note that a lower interest-rate environment helps the investment sales market.