The Phoenix industrial market showed no signs of slowing down in the second quarter, with robust leasing and sales activity, vacancy rates hovering around the record low and asking rental rates climbing to a new high, topping the previous quarter’s record rate. Net absorption posted at a healthy 2.15 million square feet of positive absorption and the development pipeline has hit a record high for this cycle with almost 10 million square feet currently under construction, a number the market hasn’t experienced since 2007. Even with the elevated level of construction, strong demand has maintained a vacancy rate well below the market’s historical average. With relatively few barriers to development and positive economic and demographic trends, Phoenix has emerged as not only one of the fastest growing industrial markets in the nation, but one of the fastest-growing data center markets in the nation. Seizing the opportunity, Apple recently invested several billion dollars to build a Data and Global Command Center in Mesa, and Microsoft is another major tech player in the region with data center needs.
Vacancy rates posted a record low of 6.9% in the first quarter and has only slightly ticked up to 7% in the second quarter. The Southwest submarket cluster posted the highest vacancy rate at 8.8%, while Pinal County reflected the submarket cluster with the least amount of vacant space at a tight 2.7%. Although Phoenix’s vacancy rate has been one of the highest in the major markets in the US, it is still near historical lows for the region. Perhaps due to the relative ease of building and low cost of doing business, as well as proximity to major regional markets, vacancies in the metro tend to trend higher than the national average. Demand has outpaced new supply in the past eight years and as a result, vacancies have tightened substantially, falling by a staggering 900 basis points since the Great Recession. With a heavy majority of the 10 million square feet of industrial space under construction due to deliver by year end, it could temporarily ease the compressing vacancies of the tightened market.
Asking rental rates for all industrial properties ended at a record high in the second quarter at an average price of $0.60 per square foot on a triple-net basis. After years of underperforming relative to the national benchmark, Phoenix rent growth has accelerated just as the national average has taken a breather and rent gains in the region have been robust when compared to the historical average. Asking rates are highest in the Northeast submarket cluster at an average of $1.01 per square foot, as this submarket cluster is comprised of the larger share of flex and R&D properties as opposed to other industrial types, influencing the higher rental rates. By contrast, the lowest rates are found in Pinal County, which reported an average asking rent of $0.54 per square foot on a triple-net basis which reflects a jump from last quarter’s $0.50 per square foot. The average asking rental rates in all industrial products are at an all-time post-recession high across the Phoenix market, with asking rental rates for warehouse and manufacturing space averaging $0.56 per square foot, while flex spaces are on the market for an average $1.16 per square foot.
The Phoenix industrial market bounced back in terms of net absorption, posting 2.15 million square feet of positive net absorption for the second quarter in comparison to first quarter’s 790K square feet. General industrial properties gave way to the majority of the positive net absorption for the market, posting 1.5 million square feet. In terms of sales, more than $2.2 billion worth of assets traded last year, a record high, while pricing also climbed to an all-time high of $100/SF. While sales transactions in the second quarter posted at 3 million square feet in volume, down from 4.6 million square feet that transacted this same time last year, and the average sales price per square foot dipped slightly to $98/SF, these numbers still reflect the highest averages we’ve experienced in the last ten years, as investors still remain bullish in the Phoenix industrial market albeit not quite at the same pace as last year.
Notable Lease Transactions
- Ferrero Rocher Chocolate, SWC Indian School & Cotton Ln, Glendale, 643,798 sf Leased
- National Indoor RV Center, 13351 W Rioglass Solar Rd, Glendale , 170,625 sf Leased
- Walmart, 901 S 86th Ave, Tolleson, 121,895 sf Leased
Notable Sale Transactions:
- BH Properties | Honeywell Campus | Surprise | 252,300 SF | $26.5M or $105/SF
- CBRE Global Investors | 5445 W Missouri Ave | Grand Avenue| 128,929 SF | $17.5M or $135/SF
- Allstate Investments | Southbank Business Park | North Airport | 121,731 SF | $15.5M or $127/SF
Source: CoStar Data
For more information contact: Jerry Holdner, Director of Research, 949.557.5000