Phoenix Metro Breaks Industrial Construction Record

Credit: Glassdoor

By Colliers in Arizona 

The Greater Phoenix industrial market is setting records in many categories. Construction of new projects has hit a historic record with approximately 19.1MSF currently being built. Colliers in Arizona also reports net absorption of industrial space has pushed vacancy rates to 5.9 percent, the lowest ever achieved in the market.  

Arizona’s economy is booming and experiencing record revenue growth, as well as personal income growth. From 2019-2020 Arizona led the nation (tied with Montana) in the category of largest personal income growth by posting a 7.1 percent increase.  

The Greater Phoenix industrial market brought 3.6MSF of new product to the market during second quarter. These new projects were completed with vacancy of just 45.4 percent. Sixteen buildings were completed during second quarter and five of those were fully leased when delivered. This strong leasing activity illustrates the rapid change of supply chain and ecommerce activity. New projects totaling 5.0MSF of new construction were started during the past three months. Approximately 73 percent of the 19.1MSF currently underway in the Valley are located in the Northwest and Southwest submarket clusters.  

The industrial market posted 5.8MSF of net absorption during second quarter 2021. This marks the ninth consecutive quarter of net absorption exceeding 1MSF. Year-to-date net absorption totals 11MSF, which is equivalent to 82.4 percent of all net absorption posted in 2020.  

Direct vacancy decreased 70 basis points quarter-over-quarter and 190 basis points year-over year to hit the mid-year point at 5.9 percent. The Southeast submarket cluster, which delivered eight buildings totaling 623KSF completely vacant, still managed to have the largest decrease of vacancy year-over-year. The Northwest submarket cluster delivered the newest inventory for the second consecutive quarter, yet this new inventory only resulted in slight vacancy rise of 70 basis points to finish the quarter at 6.3 percent. 

Average rental rates for industrial space rose again during second quarter as a result of strong tenant demand. Rates elevated 1.56 percent over-the-quarter and 6.56 percent year-over-year. The current average asking rental rate is $0.65/SF. Average rental rates have increased an average of 4.3 percent annually since 2018. The Airport Area experienced the largest increase in rental rates, followed by the Southeast submarket cluster. Manufacturing space rates surpassed Warehouse facilities with the largest increase year-over-year, increasing 9.76 percent and 9.2 percent, respectively. 

Combining the rise of rental rates and decline in vacancy has resulted in stronger sales volume. During second quarter industrial sales volume rose to $547M. The market experienced a 2.96 percent increase in median price/SF over-the-quarter to $134.  

Phoenix has now broken into the nation’s list of top tier marketplaces, which is resulting in stronger attention and demand from inverstors and new to market businesses. The appeal of Greater Phoenix will result in continued rental rate increases as the pipeline of projects under construction begins to deliver. Active tenant interest will likely keep vacancy rates low, below the 10-year average of 8 percent-9 percent. (Source) 

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