By Kidder Mathews
Kidder Mathews has released its reports on First Quarter 2021 activity in the Industrial and Office sectors.
Economic Overview
Phoenix lost fewer jobs (on a percentage basis) than any other large metropolitan area and maintains its place among the best-performing markets for job growth. A recent study by EMSI placed the Phoenix Metro as the top ranked county in the nation based on the ability to attract and retain quality workers and other economic-development factors.
According to the Arizona Labor of Statistics Office of Economic Opportunity, Phoenix metro’s unemployment rate in January increased 1 basis point month-over-month to 6.7 percent. This is compared to the state’s rate of 7 percent. Phoenix lost about 240,000 jobs in the start of the pandemic, but the sharp job losses were temporary with about 60 percent of those job losses recovered.
Industrial Market Drivers
The COVID-19 pandemic has accelerated ecommerce trends that have fueled demand for warehouse and distribution space in the Phoenix market. Amazon has been aggressively expanding in Phoenix the past year, signing 11 leases last year alone that range from smaller last-mile fulfillment centers to large-scale distribution facilities.
After a record-breaking level of supply last year of approximately 18MSF, the construction pipeline is still booming with more than 16MSF of space underway at the end of Q1. Much of the new supply is in the Southwest Valley, as the region’s proximity to California and relative affordability have fueled demand for manufacturing and distribution space. Recent infrastructure improvements, such as the expansions of Loop 202 and Loop 303, have helped with the traffic flow into the area and contributed to increased population growth in the communities.
Average asking rental rates soared to a record high of $0.65/SF on a triple-net basis. Rent growth in Phoenix has recently outpaced the national average, but despite the steady increase, the market maintains its position as an affordable market when compared to the nearby major regions in California.
Investors remain bullish on the Phoenix industrial market and continue to seek out quality assets. Local buyers are competing against many out-of-state and institutional investors, who are behind some of the largest deals in Phoenix. Buyer competition has put an upward pressure on pricing as sales prices averaged an all-time high of $139/SF in Q1.
Industrial Near Term Outlook
The Phoenix Industrial market’s record level performance in 2020 carried into the first quarter of 2021 and will continue into the remainder of the year. Demand will stay strong for not only last-mile and e-commerce users, but also for data centers and manufacturing.
The market is experiencing a surge in development and new projects will continue to break ground and come online. Developers are highly attracted to the Phoenix industrial market because of relatively few development barriers, strong demand, and a thriving local economy which will continue into the near future.
Office Market Drivers
Leasing activity slowed substantially since the start of the pandemic and the market continues to experience a weakened demand in Q1, down 33 percent from the same time last year. Sublease availability more than doubled year-over-year, as it reached an all-time high of approximately 4.1MSF, the most amount of sublet space on the market in more than 15 years.
While many office tenants are slowly learning to navigate some of the initial challenges they faced due to the tumultuous effects of COVID-19, they continue to have to reevaluate their space needs as the office culture will inevitably evolve. Employees will continue to work from home, possibly return to the office, or a hybrid of both, which will affect the future size requirements for employers.
Average asking rental rates remain at record high prices, despite the slowdown experienced in the market. However, rental rates in the Phoenix office market are more affordable than most large metros and as such, the market will benefit from those businesses leaving or expanding outside of nearby expensive metros.
Office Near Term Outlook
The wide distribution of vaccines and the remaining COVID-19 restrictions being lifted statewide has created some optimism in the market, as the road to an eventual economic recovery becomes more of a realistic possibility in the long term.
As companies continue to evaluate their space needs and requirements, demand for larger blocks of space may decline as employers reduce their office footprint while many employees continue to work from home.
An increase in vacancies and availabilities will add rent pressures over the next coming quarters. Sublease availabilities will also put pressure on rents since these spaces are offered at a discounted rate when compared to direct marketed space. (Source)