Source: Colliers International
The Greater Phoenix industrial real estate market remains healthy, despite business conditions during the pandemic. America’s growth in online purchasing is driving expanded demand for warehouse/distribution space.
Net absorption of industrial space peaked at more than 2MSF in the second quarter. This marks the fifth consecutive quarter with net absorption exceeding 1MSF. Year-to-date the market has posted 3.7MSF of positive net absorption. Net absorption was dominated by warehouse space in the Southeast and Southwest areas. Leasing activity slowed significantly in April as the nation paused and evaluated effects of the Coronavirus, but virtual tours and tenant interest picked up again in May and June.
The number of leases signed during second quarter decreased by 8.7 percent from first quarter. Tenants approaching their lease expirations have largely chosen to sign short-term renewals as they assess long-term impact of the pandemic on their businesses.
The vacancy rate for Greater Phoenix industrial space remained low at 7.7 percent at the mid-year point. This marks a continuation of sub-10 percent vacancy that began in third quarter 2015. The vacancy rate rose 10 basis points during second quarter and has risen 70 basis points over-the-year. The Southwest Valley submarket remarkably delivered more than 2.4MSF of new space to inventory during the second quarter, but simultaneously experienced a 30-basis point decline in vacancy. Supply of spaces larger than 150KSF has tightened in the market. Only 15 existing buildings can handle this size of tenant in the Airport, Southeast and Northeast areas. There are only eight buildings that can accommodate a tenant requiring 200KSF.
This relatively low vacancy is noteworthy when you consider that the Greater Phoenix market delivered 3.4MSF of new space during second quarter. Construction activity rose to 11.6MSF as developers work to provide inventory for strong demand in the market. Second quarter marks the second highest quarter of inventory under construction in the past 10 years. Approximately 9.8MSF of these are located in the West Valley. Land in the Southwest Valley along Loop 303 is being scoured by developers who are creating primarily warehouse and distribution space on those parcels. The South Mountain Freeway 202 expansion is creating more options for businesses doing a site selection, now tenants in the East Valley can look at options in the West Valley and stay within 20-30 minutes of vital campuses in the East Valley.
The Northwest submarket has become another top area for construction with 5.9MSF underway. The Loop 303 area has become highly desirable as businesses migrate north from Interstate 10.
Rental rates continued to rise, increasing nearly 4.2 percent over-the-year and up 1.16 percent over-the-quarter. The average asking rent reached $0.58/SF, with the Airport submarket posting the largest rental rate increase this year of 5.9 percent to $0.71/SF. The largest increase over-the-quarter was experienced in the Northwest submarket with 4.4 percent to $0.60. Rental rates are expected to elevate further as demand remains strong and new projects are delivered. Limited options for large contiguous spaces outside of the West Valley will fuel competition and rising rates.
Investment sales of industrial properties during second quarter decreased from the sizable amount of large multi-property transactions that took place during the first three months of the year. Both sales volume and the number of transactions decreased significantly during second quarter. The quarter posted just $320M in volume, but the median price/SF increased 4.2 percent to $116/SF.
The industrial market sector will prove to be the healthiest as we navigate the pandemic. Projects under construction are moving forward as planned with the only slowdowns being caused by delays in construction material supply chains. The rapid change in supply chain and increase in online shopping has created intense focus on the warehouse sector. The Greater Phoenix industrial market was already strong before the pandemic, but changes to lifestyle during the crisis have created even more demand for industrial space.