2024 Retail Predictions: Western Retail Advisors

Nearing the end of a year fraught with myriad challenges to commercial real estate finance, investing, and development, industry experts offered their recaps of 2023 and predictions for 2024 without mincing words about the struggles and triumphs…

Overall Phoenix Retail Market
A surge of retailers is vying to plant a flag or expand their presence in Phoenix, reversing our long-held challenge of being over-retailed into one of simply finding space. A pipeline of more than 3 million square feet of new retail construction will help that supply-demand balance, but development takes time and has required those eyeing best-of-the-best locations to plan ahead— in some cases many years out. We’re working against 20-year low vacancy rates and all-time-high rental rates, but we’re finding solutions for today’s best-in-class and compelling retail users and its most innovative owners. As Phoenix grows at breakneck speed, this momentum will only accelerate. Our team works relentlessly to find the highest quality new locations while navigating high construction costs, rents, and capital scarcity. Still, with exponentially high demand, the future of retail in Phoenix is bright.

Eric Termansen
Founding Partner
Western Retail Advisors

Big Box
In 2023, well-located big box retail experienced some of the lowest vacancy rates in recent memory. Despite notable bankruptcies from Bed Bath & Beyond, David’s Bridal, and Party City, aggressive retailers looking to grow their market presence snapped up the lion’s share of those locations. In 2024, we expect to see this trend continue. With occupancy in Class A centers at all time highs, new developments that broke ground in 2023 will begin to come online in 2024. With construction costs still elevated, these new construction projects and low big box vacancies have put upward pressure on rents. To date, the retailers’ appetite for growth has been strong enough to absorb these higher rents. But if 2024 brings any pullback in consumer spending, we could see some retailers begin to slow their growth. That said, we think rapidly growing markets like Phoenix will continue to fare well compared to other U.S. metros.

Ryan Desmond
Western Retail Advisors

Capital Markets
In the investment sales market, we expect the existing surplus of retail listings to regress towards the mean as fewer new developments hit the market due to their inability to pencil. Existing listings will adjust to market pricing in order to transact. Overall deal volume will be below average based on historical standards as investors contend with high borrowing costs and the uncertainty of a presidential election. The current pace of deal volume and cap rate adjustments will continue until investors regain the ability to lever up when purchasing a property. While these headwinds are quite real, continued tenant demand and record low vacancy rates have investor sentiment as positive as it has been since before the ’08 crisis. Existing owners will be pleased with the performance of their shopping center investments and new investors will continue to be attracted to the strong fundamentals driving demand in the sector.

Andrew Lundahl
Managing Director
Western Retail Advisors

Tenant Representation
In the year ahead, the retail tenant representation market will continue to see demand for existing retail space as need outpaces supply. While this demand will come from all sides of the retail spectrum, only those at the forefront of consumer trends will likely have the capital resources needed to afford new construction. Undoubtedly, the retail users that continue to adapt to the changing demands of the customer—from a desire for experiential retail to clicks-and-bricks conveniences—will flourish. At the same time, those who don’t embrace change will struggle. But even for the excelling retailer, a prolonged elevated construction cost could limit their forecasted growth. Until construction prices stabilize or decrease, expectations from those across the retail sector must be tempered by a much higher cost of doing business.

Dave Uhles
Senior Vice President
Western Retail Advisors

Strip Centers
Metro Phoenix’s continued population growth and rapid addition of new residential communities has pushed retail strip center vacancy to an all-time low of just 4.5%. In the new year, we expect strip center vacancy to remain low and tenant demand to remain high. New construction will be challenged with high costs to build and finance and lengthy entitlement processes. Rental rates on new construction could significantly increase as a result. Well-positioned existing strip centers will also continue to see rent increases on market rate renewals and new leases. While the rising cost of build outs may increase concessions, higher rents will more than cover these considerations for owners. Landlord expectations on credit worthiness and operator experience will remain high, given such strong occupancy rates and their ability to upgrade tenancy.

Kalen Rickard
Senior Vice President
Western Retail Advisors

Overall, Arizona continues to be a strong market for restaurants and, in some cases, one of the better-performing markets in the country. As such, demand for restaurant space in 2024 should remain strong, especially among the groups that report to Wall Street. Independent and smaller multi-unit operators will likely be more cautious with their expansion in light of the current macroeconomic headwinds. However, those with access to capital will still look to grow. Amidst the positive performance, sourcing quality locations will remain challenging given scarce supply due to delayed timelines or an outright pause of new retail projects due to high construction costs and the current lending environment.

Charles Skaggs
Senior Vice President
Western Retail Advisors

Anchor Centers
While Phoenix retail has sometimes taken a backseat to other commercial real estate, such as office or industrial, the sector re-emerged in 2023 and will continue to shine in 2024. Anchored shopping centers, in particular, are the strongest, and their occupancy rates are the highest I’ve seen in my 25-year career. Undoubtedly, COVID forever changed how people shop, which could lead to more anchors closing in 2024. But our post-pandemic normal is also punctuated by a dramatic increase in traffic counts. This has retailers sitting on the sidelines, waiting for the opportunity to scoop up available space. This will place continued upward pressure on rents at anchor centers and keep vacancy rates at all-time lows, positioning Arizona as one of the strongest retail markets in the country. It’s a great time to own retail or be an investor in retail in this market.

Bryan Ledbetter
Senior Vice President
Western Retail Advisors


Originally published by Arizona TREND Report in December, 2023.