Strong Absorption Drives Down Industrial Vacancy in Phoenix

Greater Phoenix industrial space absorption was exceptionally strong in the first quarter, driving vacancy levels below 10 percent for the first time since late 2007.  The first quarter industrial research and forecast report from Colliers International in Greater Phoenix forecasts strong tenant expansion for the remainder of 2017.  To read the full report, click HERE.


Net absorption for the first three months of 2017 totaled more than two million square feet, after tenants moved into a net of nearly 2.5 million square feet during the fourth quarter of 2016.  During the past 12 months, net absorption has totaled more than 6.5 million square feet.  The absorption has been largely focused on the Southwest Valley, where more than 1.8 million square feet of net absorption was recorded during the first quarter.  The Southeast Valley is expected to see a one-time boost in absorption during the next few years as Intel brings its 2.1-million-square-foot FAB 42 online.


This strong absorption pushed vacancy levels down to 9.8 percent at the end of March, which is 80 basis points below a year ago.  Vacancy in the Southwest Valley has fallen from 13 percent to 9.6 percent in the past year, dropping 130 basis points in the first quarter of this year.  Vacancy has been increasing in the Airport Area as new space is delivered.  More than 2.5 million square feet of new space has been delivered in that area during the past 10 quarters, increasing the submarket’s inventory by more than five percent.


Developers are active in the Greater Phoenix industrial sector, delivering nearly 1.8 million square feet of new space to the market during first quarter 2017.  Construction is forecast to continue, with approximately 4.7 million square feet currently underway and plans on the boards for more projects in the future.  Spec construction in the market has been concentrated in the Southwest Valley, where more than 1.8 million square feet of spec space is currently under construction.  Developers have delivered at least five million square feet of new space each year since 2013.


Asking rental rates ticked up to $0.56 per square foot, per month in the first quarter.  Current rents are five percent higher than a year ago and that pace of rate growth is expected to continue for the remainder of the year. Flex buildings are posting some of the strongest rent gains in the Phoenix market.  Rates for flex space spiked by 8.6 percent in the past year to $1.08 per square foot, per month.  The Southeast Valley contains nearly half of the Greater Phoenix flex space and rates in that area increased four percent in the past year to $1.11 per square foot, per month.


Sales of industrial buildings rose by five percent in the first quarter and prices ticked up to $75 per square foot.  Transaction counts in the first quarter were up 16 percent from first quarter 2016.  Cap rates rose in the first quarter as well, averaging 7.7 percent.


Industrial tenant expansion is expected to remain healthy in the upcoming years.  Net absorption will likely continue at its current pace with more than six million square feet expected this year.  The $7 billion Intel FAB 42 project will bring 2.1 million square feet to the market, which will add thousands of high-wage engineering and equipment technician jobs in the Southeast Valley.  Local housing improvement will also support industrial market fundamentals.  While previous years have seen residential construction in the multifamily sector, the market is poised to change course in the next 36 months toward single-family growth.  Strong tenant demand will support the investment and sales of industrial properties.  New buildings account for approximately five percent of sales, but that figure has been rising since 2015.  The addition of many new industrial projects will add to the appeal of Phoenix as an investment opportunity.


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