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
Partner
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

Restaurants
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

PHOENIX, Ariz., Nov. 15, 2023 – Dave’s Hot Chicken, a Nashville-style hot chicken restaurant from Southern California, is set to open its second location in Phoenix this week, and has plans to open several more in the coming months.

Dave’s Hot Chicken has gone from a scrappy, late-night pop-up to being the fastest growing restaurant chain in the nation. Come this Friday, November 17, Phoenix residents will be able to get their hands on the hot chicken so good, it made superstar Drake  want to invest.

Opening this Friday, the newest Dave’s Hot Chicken restaurant will be located at 475 E. Bell Rd., Suite 172, in the Target Shopping Center at the corner of Bell Road and 7th Street. It will be open seven days a week from 10 a.m. until 1 a.m.

The endcap restaurant – which features an outdoor patio, locally inspired street art and plenty of patron parking – will be owned and operated by franchisees and brothers Devon and Clinton Wesselink of Elevated Restaurant Group AZ.

“We are bringing even more heat to the desert with Dave’s Nashville hot chicken,” said Devon Wesselink. “This is our first Dave’s location in the city of Phoenix but we are actively seeking more location opportunities throughout the market, with a focus on expanding in the West Valley.”

Dave Uhles and Alberto Caballero of Western Retail Advisors represented Elevated Restaurant Group in the transaction.

“There’s a cool factor about the Dave’s Hot Chicken brand that has boosted its already rapid growth across the country and attracted celebrity investors,” said Caballero. “We are excited to continue to be a part of the brand’s expansion plans in Arizona and to capitalize on this state’s love of quick serve restaurant concepts.”

Dave’s Hot Chicken specializes in Hot Chicken Tenders and Sliders, along with sides of house-made Kale Slaw, creamy Mac n’ Cheese, crispy, seasoned French Fries, and Shakes. Offered at various spice levels ranging from No Spice to Reaper™ (which requires a signed waiver for those who dare), each piece of juicy, hand-breaded chicken is spiced-to-order.

“Our founders started Dave’s as a parking lot pop-up restaurant in Hollywood with a portable fryer and picnic tables from their backyards just six short years ago. We’re thrilled to be opening our second restaurant in Phoenix,” said Bill Phelps, Dave’s Hot Chicken’s CEO.

About Dave’s Hot Chicken
In a modern-day American dream story, three childhood friends, Chef Dave Kopushyan, Arman Oganesyan and Tommy Rubenyan, scraped together $900 in 2017 to launch Dave’s Hot Chicken in a parking lot, portable fryers and folding tables in tow. Dave’s Hot Chicken quickly took off, opening an East Hollywood brick-and-mortar restaurant shortly after, with support from Tommy’s brother, Gary. In 2019, the team struck a deal with Wetzel’s Pretzels co-founder and former CEO, Bill Phelps, and movie producer John Davis to begin franchising the Dave’s Hot Chicken concept throughout the U.S. and beyond.  The company has sold the rights to more than 700 franchise locations in the U.S., Middle East and Canada and will open 70-plus locations this year. Harkening back to an Eater LA blog that helped propel early interest in the brand, the company’s mission is to “blow their minds.” Additional brand investors include Billboard’s Artist of the Decade, Drake, former California First Lady Maria Shriver, actor Samuel L. Jackson, and Good Morning America anchor and retired NFL player Michael Strahan.

Brandon Brown, Phoenix Business Journal

Activity in the downtown Phoenix area hasn’t fully recovered since before the Covid-19 pandemic but is performing better than most large cities across North America, according to recent data from the University of Toronto.

Phoenix ranked No. 21 out of 63 downtowns measured, with a 72% recovery rate in the spring of this year compared to the same time period in 2019, according to the university’s research, citing mobile phone data. Salt Lake City had the highest recovery at 139% and San Francisco had the lowest at 32%.

The Phoenix geographical area included in the study spans from south of Interstate 17 through downtown and north to the midtown area. Downtowns were defined in the data based on areas of highest employment density.

Before Covid-19, downtown Phoenix was starting to gain momentum with the light rail, numerous residential projects and the growing higher education and bioscience corridor.

That growth included a new Fry’s downtown grocery store that opened in 2019 near the sports arenas, said Charles Skaggs, a senior vice president at Western Retail Advisors.

“For me, in my world, that was a huge validator that people are living downtown and they’re shopping downtown because Fry’s was having great success,” Skaggs said.

Because the office market took a major hit during Covid, this impacted the retailers that relied heavily on the workday traffic but is now being offset by the growing population in the area, experts say. The Super Bowl in February also helped bring hundreds of thousands of visitors to downtown Phoenix.

Phoenix has lots of downtown cranes — for residential projects

Since 2015, Downtown Phoenix Inc. data shows that nearly 7,500 residential units have been built downtown. As of Q1 2023, about 3,540 additional units were under construction while the current population is 23,919, a 22% increase from the 19,500 residents in 2020.

The growth of apartments in downtown has also contributed to the high number of cranes counted this spring, which totaled nine in Q1 2023. The Business Journals also created a downtown vitality index that assessed the performance of city centers earlier this year, which showed that Phoenix was the 10th best market for downtown recovery since the pandemic out of 40 large metro areas because of migration and air traffic.

Currently, Skaggs said most of the retail options in downtown Phoenix mostly consist of restaurants and entertainment but more boutique shops have started to pop up around Central Avenue and Roosevelt Row. About 75,150 square feet of retail space was under construction in Q1 of this year, according to Downtown Phoenix Inc.

“I think we still have a ways to go in terms of attracting more of what you would see, a mass of soft goods apparel, but I think we’re heading in the right direction,” he said. “It all goes back to the lack of people that had been living down there and now you’ve seen more people taking up primary residence downtown.”

Office sector still faces challenges

Downtown Phoenix’s office sector has struggled to bring back workers and companies while some office towers are starting to look toward turning into housing, hotel or retail uses. But the pandemic also gave office landlords the opportunity to upgrade their properties as more companies are looking for class A office space and amenities for their workers, said John Bonnell, a managing director at JLL.

Some buildings have secured leases in recent months but Bonnell said downtown Phoenix is seeing bigger changes behind the scenes in building ownership as office loans come due.

“I think the skyline on office buildings could get a little smaller, but that’s not a bad thing down there because the remaining buildings are in a really good position to lease space,” he said. “The office is just starting to come back down there. We’ve seen in the past year a lot of existing tenants expand.”

To move the office market forward in downtown Phoenix, Bonnell said the submarket needs to secure a high-profile or technology-related company as a major office tenant. In Q2 of this year, the downtown Phoenix submarket had a 26.9% direct vacancy with average asking rent at $32.94 per square foot.

“We need another one of those to jumpstart the office so we can get a big user or couple of big users to commit downtown so others can say ‘Wow, if they’re down there, it must be the place I need to be,” he added.

Real estate experts say downtown Phoenix still has room for growth as the city works to define what downtown will become in the next 10 years as more people move into the area. The city has been working on plans for a new hotel and expansion at the Phoenix Convention Center and is in the initial stages of examining a new downtown entertainment district.