Metro Phoenix Records Lowest Industrial Vacancy Rate Since 2007

The Metro Phoenix industrial market continued to display strong improvement through the second quarter of 2016, recording a vacancy rate of 9.6%. This is a 50 basis-points (BP) reduction since 1Q15 (10.1%) and marks the lowest vacancy rate since the third quarter of 2007, according to the second quarter industrial report released by Cushman & Wakefield.

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Eleven of the 17 defined industrial submarkets experienced a decline in overall vacancy with the Chandler (9.2%) and West Mesa (6.0%) submarkets setting the pace, dropping 210 BP and 370 BP, respectively. The Metro Phoenix industrial market posted a 1.7% decrease in vacancy since the second quarter of 2015, with 14 of the submarkets reporting gains in occupancy. Conversely, the Gilbert-Gateway submarket experienced the largest increase in vacancy, growing 1.9% over the last three months due to 350,000 square-feet (SF) of speculative general industrial, multi-tenant space that was delivered in 2Q16.

“The second quarter of 2016 wrapped up with nearly 2.2 million square-feet (MSF) of occupancy growth. Distribution and general industrial (multi-tenant) space remains in high demand, reporting net gains of 631,000 SF and 611,000 SF, respectively,” said Curtis Hornaday, Associate Market Director of Research with Cushman & Wakefield.

The West Central Phoenix submarket led Metro Phoenix in absorption for the quarter with over 745,000 SF, dropping its vacancy from 12.2% in 1Q16 to 10.8% at the close of 2Q16. A significant portion of this occupancy growth can be attributed to Kroger (200,000 SF) and StichFix (122,000 SF) taking a combined total of ±322,000 SF. Glendale posted a net gain of over 400,000 SF in 2Q16 with IRIS USA moving into their new 384,000 SF build-to-suit (BTS) regional headquarters. Southwest Phoenix reported negative absorption of 145,000 SF because First Solar gave back 241,000 SF of their warehouse/distribution center. Tempe rebounded in 2Q16 with 238,000 SF of net absorption after posting 43,000 SF of negative absorption in 1Q16.

Over 1.1 MSF of new product was added to the Metro Phoenix industrial inventory in 2Q16, 527,000 SF which came online preleased or in the form of BTS projects. The 2Q16 new development brings the year-to-date total to nearly 2.7 MSF with 88% of the completions being distribution and multi-tenant properties. Cushman & Wakefield is tracking an additional 2.7 MSF of industrial product currently under construction, all of which is scheduled to be completed by the end of 2016. Nearly half, 49%, of the under construction space is preleased.

“Over 94% of the 2.7 MSF currently under construction are distribution and general industrial (multi-tenant) properties, as developers continue their focus on bringing these two product types to the market,” said Hornaday.

The average direct industrial rate in Metro Phoenix currently stands at $0.54 per square-foot (PSF) on a monthly triple net basis. Over the last three months asking rates increased in Chandler ($0.76 PSF) by $0.08 and Mesa ($0.70 PSF) by $0.07 PSF. The East Mesa submarket experienced the greatest increase in asking rates over a twelve month period, jumping from $0.59 PSF in 2Q15 to $0.70 at the end of 2Q16.

“While absorption has nearly doubled since 1Q16 in Metro Phoenix, we continue to see only modest growth in asking rates,” said Hornaday.

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