I love being wrong because that is when I learn the most – and boy was I wrong about RETAIL real estate!
Having grown up in AZ, I visit the Phoenix area often. And every time I am simply amazed by the sheer quantity of retail real estate.
There are vast and elaborate retail strip centers of every type at every intersection – often on all four corners. For the last 40 years, I have been hearing that Phoenix would see a retail real estate meltdown as a result of the oversupply.
When Amazon came on the scene, the meltdown seemed all but inevitable. BUT, in sharp contrast to the rest of the commercial real estate world, retail real estate is not only not collapsing, it is absolutely thriving in Phoenix.
Joshua Simon, the founder of Simon Commercial Real Estate, was on this recent Jason Hartman podcast, explaining why retail real estate is doing so well. The podcast is only 27 minutes and super interesting too, so, as always, I highly recommend it.
Multi-Family Housing = Uh Oh…
There are over 50,000 apartments under construction in Phoenix right now. But – Phoenix can only absorb 8,000 to 9,000 units per year. So, we will see a multi-family meltdown from overbuilding and much higher financing costs.
Industrial/Warehouse Space = Double Uh Oh…
There is 11 million square feet of VACANT industrial space west of the Mississippi, and 8 million square feet is in Phoenix alone.
Retail Commercial Is Thriving – Why?
Amazon did not kill retail in Phoenix for several reasons.
- Builders stopped developing retail space in the face of concerns about oversupply and high construction costs.
- Retailers learned to compete with Amazon by offering online purchases and in-store pickups.
- Strip center retail shifted focus. Stores like T.J. Maxx, Dollar Stores, Ross, and Sprouts (that don’t compete with Amazon) now dominate many centers in ways we never saw in years past.
Here are a few more interesting factoids:
- Retail vacancy rates are only 4.5% in the U.S., and that includes dying shopping malls.
- Top-tier shopping malls, like Scottsdale’s Fashion Square, will continue to thrive – despite what we hear about all shopping malls dying.
- Strip centers with grocery anchors are the most desirable.
- Many dying shopping malls are slow to change over to something more desirable, e.g. mixed use, because the former anchor tenants (like Sears and Macy’s) own their stores and sometimes refuse to allow mall owners to make changes.
- 80% of retail space under construction now is pre-leased, while 0% of industrial space under construction is pre-leased.
- Small investors looking to invest in commercial real estate should focus on quick service restaurants with strong operators (like a profitable Taco Bell).
- When Bed Bath & Beyond filed for bankruptcy, their retail space got snapped up immediately.
Why Care About Retail Real Estate?
There is a lot of gloom and doom in my blog and about the economy in general, but this retail real estate story is another reminder of how dynamic the American economy is. In 2009, everyone thought overbuilding and Amazon would crush the entire retail sector, but 15 years later it is now thriving. This is very similar to what we saw with residential housing too. Things are never as bad as they seem…
