Low Vacancy Despite Lots of New Projects

Credit: Colliers International

Source: Colliers International
The Greater Phoenix industrial real estate market has a healthy equilibrium in the midst of bringing millions of new square feet to its inventory. Vacancy remains below 10 percent after the city added 6.4MSF of new space in 2019 and has another 10.5MSF under construction.
Greater Phoenix has a checkered history of overbuilding its real estate markets during strong economic times but appears to be avoiding that trend during this cycle. The city remains in the top five American metro areas in terms of job growth. During the 12-month period ending November 2019, employers added 56,500 net new jobs to the area, which helped fuel demand for industrial real estate. During the decade spanning from 2009-2019, Phoenix ranked 10th of large cities in terms of total employment growth with an increase of 29.7 percent.
Expanding companies in the area and businesses moving into this market have driven positive net absorption in the industrial market. During fourth quarter 2019, net absorption of industrial space totaled 1.64MSF, ending the year with a total of more than 5MSF of net absorption. Net absorption had a mild slowdown during the beginning of 2019 but picked up in the last three quarters. Warehouse and distribution space saw the highest net absorption in 2019 at 3.8MSF and 735KSF, respectively. The Southwest submarket represented 68.7 percent of the leases larger than 50KSF in the fourth quarter.
Phoenix ranks as one of the fastest-growing data center markets in the nation. Our state tax incentives and a climate that offers few natural disasters have helped us become a hub for this type of space usage.
Projects under construction increased to 10.5MSF at the end of 2019. The Southeast Valley currently has 2.13MSF under construction, and Southwest has 5.9MSF underway. During 2019 the development market delivered 6.4MSF of space, which is a decline of 20 percent from 2018. Since the beginning of 2018, Greater Phoenix has added more than 14MSF of industrial space to its inventory. Fourth quarter 2019 brought more projects breaking ground than any quarter in the past five years.
The addition of new inventory is putting upward pressure on vacancy, which rose a minor amount during fourth quarter. Despite this pressure, vacancy across all submarkets remains well below 10 percent, with some variance based on building type. The market average is 7.1 percent vacancy, with manufacturing declining to 3.3 percent vacancy. Vacancy for industrial space has been in the low-to-mid 7.0 percent range since the end of 2017. The largest increase in vacancy was found in the Southwest Valley where an increase of 160 bps occurred during 2019, elevating to 9.0 percent. This was largely due to 2.5MSF of new space coming online in the area. More speculative development will come online throughout the valley in the next few quarters, which will drive vacancy to near 7.5 percent.
New deliveries and relatively low vacancy rates are pressing rental rates up. Average asking rates rose 5.1 percent during the fourth quarter to $0.59/SF. The Airport submarket experienced the largest increase of 5.5 percent during fourth quarter to $0.72/SF. Low vacancies and the addition of new, more expensive product will lead rents to increase further during 2020. The overall average will likely reach the low-to-mid $0.60/SF/month by year-end.
Sales volume of industrial buildings decreased 43 percent during fourth quarter of last year, but 2019 overall brought an annual increase of 57 percent over 2018. During 2019 the market experienced $2.4B in sales, with a median price of $105/SF. This is the second-highest price posted in recent years, just below Q3 2018 at $107. Cap rates compressed, falling 34 bps over the year to 6.54 percent.

Be the first to comment

Leave a Reply

Your email address will not be published.