Phoenix Industrial Market Poised to Accelerate in Second Half of 2017

The Greater Phoenix industrial market posted strong performance in the first half of 2017 and all indicators point to an acceleration of activity in the final six months of the year. The predictions are part of the second quarter industrial market report from Colliers International in Greater Phoenix, which can be read in its entirety by clicking Here

Vacancy of industrial space fell to 9.5 percent at mid-year, 130 basis points below a year ago.  This marks the lowest vacancy in Greater Phoenix since year-end 2007.  The Southwest Valley is recording the most dynamic declines, ending second quarter at just 9.1 percent, which is 370 basis points below a year ago.  Vacancy has dropped each of the past three years and is expected to continue that trend.

Net absorption remained strong in second quarter, topping one million square feet for the seventh time in the past eight quarters.  Greater Phoenix posted nearly 4.2 million square feet of net absorption in the first half of this year.  Strong tenant demand will continue this trend through the remainder of 2017. More than 50 percent of the net absorption last quarter was in the Southeast Valley.  However, the Southwest Valley tops the market when you look at the entire first half of the year.  The Southwest Valley posted its strongest six months since 2014 with more than 2.7 million square feet of net absorption.

The largest lease to take place this year was UPS leasing 970,000 square feet along the Loop 303 in the Northwest Valley.  The move is expected to bring 1,500 new jobs to the Phoenix economy.  Despite this sizable transaction, the volume of large leases declined during the first half of 2017.  However, the trend is expected to change direction in the second half, driving vacancy down further and net absorption higher.

Rental rates in the industrial sector remained flat during second quarter. Holding at an average of $0.56 per square foot per month.  Current asking rents are up 1.8 percent from a year ago.

Investors remained keen on Greater Phoenix during second quarter with activity picking up and prices pushing hither.  The median price for transactions year-to-date was $79 per square foot.  Cap rates are compressing, even in the face of higher interest rates.

Construction deliveries in the industrial sector fell during second quarter with only 660,000 square feet of new space being delivered.  This was down from nearly 1.8 million square feet coming online in the first quarter of 2017.  Deliveries will accelerate in the third quarter as approximately 4.9 million square feet are under construction. Most notable at the moment is the one-million-square-foot facility for Conair that is being built in the Northwest Valley.

Colliers International predicts the remainder of 2017 will bring stronger conditions to the industrial market.  As spec buildings come online and are leased by tenants, it will open up the pipeline for more development.  Local employment trends will support the industrial sector, as the growth in white-collar jobs is slowing and the expansion of more industrial-focused jobs expands.  Construction employment is predicted to grow by five percent during 2017 and manufacturing is expected to expand by two percent per year.

Tenant demand shows no signs of decline, which will fuel investor interest in this market.  Since 2015, there have been 20 sales transactions of newly built developments.  As spec projects are developed, they will provide more quality supply for these investors to acquire.

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