Let’s look at 2013 to date. What can you tell us about the industrial market in the Valley over the last six months?
The last six months have seen an enormous amount of activity from tenants in metro Phoenix, and this is very much in line with showings in all sectors of the industrial marketplace. However, this is not in sync with lease signatures. Normally, when activity is this high, and I’d say it’s at about an eight or nine on a scale of one to 10, we see that reflected in the net absorption figures. As of the end of quarter two, our total net absorption is off from last year by about 40 percent. That being said, we have seen the leasing activity in the 5,000 square foot to 25,000 square foot range dramatically increase and that is a very healthy sign for the market.
So, what’s going on right now and what can we expect for the rest of 2013?
The smaller, 5,000 to 25,000 square-foot spaces are seeing excellent activity right now, and I expect that to continue throughout the year. This type of activity is up Valleywide. These “block-and-tackle” spaces are really at the heart of our market, and when that part of the market is healthy that’s good for everyone. As for the larger industrial assets, we have 11 buildings available today that can accommodate 300,000 square-foot or larger warehouse tenants (either existing or soon to be completed) and a high level of tenant inquiry and activity. It will only take a few of these large industrial deals to be signed to see a dramatic impact on our absorption numbers.
What kind of effect will that have on the market?
Vacancy rates have seen a small increase this year due to this new square footage coming on line. These buildings, which are all high-end, class A space, will add another 3.9 million square feet to our base of 280.1 million square feet. This is almost a 1.5 percent increase in the base. However, if we lease the six buildings being completed this year in eight large transactions, the vacancy number will drop dramatically. I want to again emphasize that the level of activity from users touring our market in this size range is very high. Investors seeking industrial properties are numerous, but available product is in short supply. Thus cap rates are at new lows and per square feet pricing is high; it’s basic supply and demand.
Another thing to note is that with almost 4 million square feet of new buildings being completed, it’s unlikely that we’ll see any new starts until a few leases are signed. But, as I’ve said, activity has been extremely high and we have a lot of users looking at this space. Things can change quickly. There are some savvy developers on standby today ready to move quickly when these leases are signed.
SIDEBAR IDEAS: By The Numbers
Current asking triple net lease rates by product type*:
– $0.64/sq. ft. – Multitenant buildings
– $0.37/sq. ft. – Distribution buildings
– $0.59/sq. ft. – General industrial buildings
– $0.96/sq. ft. – Flex/back office buildings
*In the past year, the multi-tenant, distribution, freestanding and general industrial and back office product types all saw an increase in average asking triple net lease rates.