Metro Phoenix: Red Hot Industrial Market

The Metro Phoenix industrial market remains strong through the third quarter of 2016, recording a vacancy rate of 9.3%, according to the third quarter industrial report released by Cushman & Wakefield.

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Fifteen of the 17 defined submarkets have experienced improvements in overall vacancy rates since Q3 2015. The Southwest Phoenix saw a decrease in vacancy, finishing Q3 2016 at 12.6%. This is due in large part to Ozburn-Hessey Logistics (OHL) leasing approximately 295,695 square feet (SF) of Phase 1 at 10 West Logistics Center and Western Window Systems leasing 169,685 SF at Airport I-10 Business Park.

Distribution space recorded the greatest net gain out of all product types, posting nearly 1.3 million square feet (MSF) in positive net absorption for the quarter. This robust demand accounts for 56% of the total net absorption for Q3. In addition, it marks the seventh straight quarter in which distribution space has topped the charts, when it comes to total square feet absorbed over other product types. General industrial, manufacturing space placed second for total absorption, bringing in 380,000 SF of occupancy growth for Q3.

The Southwest Phoenix submarket led Metro Phoenix in absorption with nearly 1.2 MSF of occupancy growth, reducing its vacancy from 13.4% in Q2 2016 to 12.6% at the close of Q3 2016. During the third quarter, Cohen Asset Management purchased Home Depot’s state-of-the-art Rapid Deployment Center in Tolleson, totaling 466,418 SF for $48 million.

“The third quarter of 2016 concluded with over 2.2 MSF of net absorption, bringing the year-to-date (YTD) total to over 5.8 MSF. This YTD absorption marks a 29.8% increase when compared to the YTD total that was in place at the conclusion of Q3 2015,” said Curtis Hornaday, Associate Market Director of Research with Cushman & Wakefield.

Nearly 1.5 MSF of new product was added to the Metro Phoenix industrial inventory in Q3 2016. Of that, over 1.0 MSF came online preleased or in the form of BTS projects. The Q3 2016 new development brings the YTD total to nearly 4.2 MSF, with 90% of the completions being distribution and multi-tenant properties. Cushman & Wakefield is tracking an additional 20 projects (2.1 MSF) of industrial product currently under construction, with 1.1 MSF scheduled to be completed by the close of Q4 2016 and the remainder to be completed by the end of Q1 2017. Only 112,000 SF of the under construction projects are currently preleased.

“Over 77.6% of the new deliveries in Q3 2016 were distribution space, as developers continue to increase the inventory base to meet the demand for this product type in the Metro Phoenix market,” added Hornaday.

Metro Phoenix’s direct average asking rate continues to climb with a present rate of $0.56 per square foot (PSF) on a monthly triple net basis. This marks a 3.6% increase from the rate that was in place just three months ago. The East Mesa submarket ($0.73) has shown the greatest increase in direct average asking rate year-over-year, jumping $0.15 PSF from Q3 2015. In addition, the Grand Ave ($0.43 PSF) and Chandler ($0.77 PSF) submarkets both added $0.09 PSF to their direct average asking rates over the last twelve months.

“The Phoenix industrial market continues to benefit from its supply of affordable housing, an abundant pool of labor, a business-friendly environment and connectivity to other metro areas across the southwestern U.S.,” said Will Strong, Senior Vice President with Cushman & Wakefield. “Investors and users alike see value in our market with critical industrial amenities that include an extensive freeway network, an exceptional international airport and modern infrastructure.”

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