PICOR Connect | Trends in Commercial Real Estate

Retail Real Estate: Rattled Yet Resilient

Posted on Fri, Nov 06, 2020

As in most markets in the United States, the Tucson retail real estate market strained in the third quarter to adapt to the realities of COVID-19 era business. Some large format retailers already pressured by online retailing and changing consumer preferences have simply been unable to continue operation.

The second quarter closing of Macy’s at Park Place Mall (153,511 square feet (sf)) was followed by JC Penney’s at El Con (220,291 sf). These closures have happened on the heels of bankruptcy proceedings for GNC, Victoria’s Secret, Pier One Imports, Stein Mart, Papyrus, Stage, Brooks Brothers, Tuesday Morning, and others impacting shopping malls most heavily.

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As a result, malls in Tucson currently post the highest vacancy rate of any retail subtype at 10.9%. This stands in stark contrast to low vacancy rates at Power Centers (2.1%) and General Retail (2.9%). The lower vacancy rates in both subgroups may be due to a combination of greater potential for adaptive reuse (office, medical, etc.) and the relative tolerance to COVID-19 impacts as open air structures.

Overall aggregate retail vacancy rates will continue to appear high until these major mall vacancies are either re-tenanted or, more likely, re-purposed. Unfortunately, the stresses of the current pandemic have not been restricted to malls and large retailers.

The Tucson restaurant market lost some mainstays and community favorites with the recent closure of Athens on 4th, Alibaba Mediterranean, Rincon Market, Gee’s Garden, and Café Poca Cosa. Restricted operating guidelines set forth by the Pima County Health Department have created a restaurant business environment that many local operators simply cannot withstand. Despite these closures, many new restaurateurs planned openings, seizing opportunity during disruption.

ECONOMY:

Amid the COVID-19 pandemic, more than 20,000 businesses in Arizona received economic relief from the federal government. Arizona’s unemployment rate has fallen from 10.7% in July to 5.9% in September due to nearly 80,000 jobs being added in August.

Job gains were posted across ten private sectors, with the largest increases seen in health services, education, and transportation.

After reaching a high of 13.1% in April, Tucson’s unemployment correlated closely to the state’s, falling from 10.7% in July to 5.9% in September versus a national unemployment rate of 8.8%.

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PRICING:

Even under the current COVID-19 related constraints, the end of Q3 saw a 12-month rent growth of 2.5% year-over-year to post an average triple net (NNN) market rent of $17.86 per square foot (psf) per year. This is an excellent indicator of the overall vibrancy of the retail market in Tucson.

Positive rent growth at a 6.4% vacancy rate highlights that the vacancy statistics are skewed by shopping mall and big box vacancy. When mall inventory and vacancy are backed out of the overall retail inventory and vacancy, the result is a non-mall vacancy rate of 5.9%, consistent with the positive, but moderate, rent growth that the Tucson retail market has experienced.