The Phoenix Retail Market Story: Q&A with Patrick Dempsey

Tuesday, November 20, 2018

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 78,000 jobs (September 2018 MSA Employment Report) over the trailing 12 months, representing almost four percent in annual growth. Furthermore, according to future forecasting by Arizona’s Economic and Business Research Center, employment in Phoenix is expected to grow an additional three percent in 2018, nearly doubling the expected U.S. employment growth.

The Phoenix retail market has seen an increase in both occupancy and rental rates since 2012, and that trend is continuing through 2018. Last year 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 HFF's Phoenix office last summer 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 HFF 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 is 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 that the market is on the edge of a rise in interest rates that would cause cap rates to go up and values to decrease. This type of environment makes it tougher to transact, but not impossible. It's important to note that this fear is in spite of 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 shop and restaurants. Esthetics are important, as people want an enjoyable shopping experience.
  • Looking forward to 2019, where do you anticipate the market being in the coming year?  Although we haven’t seen its affect yet, we are in a rising interestrate market that will ultimately effect property values. If this happens, we could see reduced sale transaction volume for individual shopping centers, as owners will want to wait for yesterday’s pricing. The solution to the rise in interest rates and the corresponding effect on values could be rental growth, as overall vacancy rates continue to decline, we should see widely spread increase in retail rental rates which helps to bolster property values.

About Patrick Dempsey

Patrick Dempsey is a managing director in HFF's Phoenix office. With more than 30 years of commercial real estate experience, he specializes in retail investment advisory and capital markets transactions in Phoenix and the southwestern United States. Throughout his career, Mr. Dempsey has completed more than 30 million square feet of transactions valued in excess of $4.7 billion.

Mr. Dempsey joined the firm in July 2018. He joins HFF from Lee & Associates, where he was a principal and member of the top-performing investment sales team since 1996. Prior thereto, Mr. Dempsey worked at Grubb & Ellis Commercial Brokerage and began his career with Pacific Southwest Realty Services. He is an active member of the International Council of Shopping Centers has earned the National Association of Realtor’s CCIM designation.  

About HFF's Retail Group

HFF is a top-producing capital markets intermediary for retail assets having closed more than $101 billion in over 5,000 transactions since 1998. Our capital markets advisors are experts in investment advisory, providing construction, interim and permanent debt alternatives, ground-up development capitalization and equity placement options, including joint ventures, participating debt and mezzanine financing structures.  Learn more about HFF's Retail Group here.

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