By Kidder Mathews and BEX Staff
Kidder Mathews has released its Q3 2023 Phoenix Industrial CRE Market Update. The report’s three key market highlights show:
- New deliveries soared to a record high of 13MSF;
- Rental rates jumped to a record $1.04/SF NNN, and
- Sales volume fell Quarter-over-Quarter and Year-over-Year to 4.8MSF.
Market Drivers
After the surge in activity experienced in recent years following the onset of the pandemic, the Phoenix industrial market is beginning to shift toward a more normalized trajectory. With the substantial volume of new deliveries in Q3, vacancy and availability rates have increased 40% YoY and 31% YoY, respectively.
The unprecedented volume of the industrial construction pipeline puts Phoenix on the map for ranking among the top in the nation for not just construction activity but as a frontrunner for demand and growth. A record high of 13.1MSF of space was delivered in Q3 alone, with another 30.7MSF projected to be completed by year-end.
Despite the impact of higher interest rates and stricter lending standards, deals are still being made throughout The Valley. Although sales volume is waning from the record high numbers experienced in the past couple of years, there is significant interest from investors in newly constructed, strategically located assets.
Economic Overview
The Phoenix market continues to excel as one of the nation’s top performing markets for employment growth. Thanks to a diversified employment base across multiple industries, the labor market now has more than 150,000 more jobs than pre-pandemic, the fourth-largest gain in the nation.
According to the Arizona Office of Economic Opportunity, Phoenix metro’s unemployment rate in August increased 10 basis points YoY to 4% but decreased 20 basis points Month-over-Month from 4.2% in July. This is compared to the state’s unadjusted rate of 4.6% and national rate of 3.9%.
Near-term Outlook
While many other major industrial markets are experiencing a cooldown, Phoenix remains in high demand for logistics, ecommerce and manufacturing users looking for mega warehouse space. This is especially apparent with the migration of companies leaving nearby markets in Calif., such as Inland Empire, seeking discounted rates. This trend will continue into the coming years, helping Phoenix to stay at the top of the industrial ranks among the nation.
Due to the overwhelming construction pipeline, it is expected that vacancy rates may experience a temporary spike in the market and demand being outpaced, due to the sheer volume of projects being delivered by year-end, most without a tenant in place.