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InterFace Brokerage Panel: Phoenix Industrial ‘Moving Up the Food Chain’

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The InterFace Phoenix Industrial conference and networking event was held on Wednesday, Sept. 12, featuring three panel discussions.

The brokerage panel, moderated by Rob Martensen, executive vice president with Colliers International, featured a lively discussion about activity in local submarkets and a recap of the reasons Phoenix is winning deals over Southern California and Nevada.

Industrial Activity in Arizona

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Anthony Lydon, JLL

Microsoft recently purchased 267 acres for a data center in the West Valley, said Anthony Lydon, national director, Industrial Supply Chain & Logistics Solutions with JLL.

Qualified data centers receive waivers on personal property tax for 10 years, Lydon said, noting that each rack in a data center is approximately $1 million in personal property, so data centers are certainly enjoying the benefits of locating in Arizona.

Arizona will also be a huge winner in the manufacturing sector, Lydon added. He cited Colorado-based food packaging provider Ball Corp. as an example of a company that was looking at Mexico for space before the 2016 election but has since opened a plant in the West Valley submarket of Phoenix due to the strategic location between Mexico and Southern California.

Minnesota-based Andersen Windows & Doors is buying 64 acres from Opus to build a manufacturing building in Goodyear, Arizona. “That will create 400 to 500 jobs,” said Andy Markham of Cushman & Wakefield.

Andy Markham, Cushman & Wakefield

Blue Buffalo, represented by Cushman & Wakefield, recently leased 540,000 square feet in Goodyear. Markham explained that Phoenix won out over other markets in California and Nevada due in part to a healthy job market and affordable housing.

Phoenix Ranks High in Market Comparison Studies

Phoenix’s employment base is one of the market’s competitive advantages nationally, noted Lydon. “Many Tier 1 markets are seeing a shortage of a qualified, affordable workforce, but we’ve got terrific runway here.”

He went on to note that 85,000 people move into the state each year and he pointed out that the local universities provide a strong base, especially for engineering roles.

Lydon said that Goodyear is a strong submarket, with development along Loop 303, and benefitting from the reverse commute and the foreign trade zone (FTZ)  benefits.

Cooper Fratt, CBRE

The Airport submarket is having a strong 2018, after having an off year in 2017. Absorption in the market in 2017 was less than 1 million square feet for the first time since 2011, “for no particular reason,” said Cooper Fratt, first vice president with CBRE. “The market is popular for all the right reasons: located in the center of town right next to a huge airport, with good access to the Valley freeway system and a great labor base.”

It is a tight market and it is tough to find development sites that don’t require a lot of clean up. “Rents in the Airport market will certainly go up,” he predicts.

Growth & Development

The expansion of Loop 202 will relieve a lot of traffic, according to Markham. “It will have the biggest impact on the Downtown and Airport markets, allowing trucks to bypass downtown.”

He noted that half of the freeway is along an Indian reservation, which makes it difficult to optimize development, but that land values will increase in value from Interstate 10 all the way around the curve.

In fact, Trammell Crow just purchased a tract fronting the 202 Freeway for a 554,000-square-foot project, and Amazon has a building underway at 59th Avenue and the 202 — that site will include about 650 parking spaces and 250 trailer spots.

Lydon noted, “Lucid Motors is going to build a $2 billion electric automotive plant in Pinal County to compete against Tesla. Nikola Trucking is moving to Coolidge — they will spend billions. And the Pasternack team is building 1.1 million square feet with 40-foot clear ceilings at Interstate 10 and 83rd Avenue; it is the largest spec project in Arizona.”

When asked about smaller businesses in the market, Leroy Breinholt, an industrial broker with Commercial Properties Inc. (CPI), noted that they have strengthened tremendously in the Phoenix market. “Construction, manufacturing and light distribution are all growing. Everyone’s business is doing well. If they aren’t doing well now, they should probably do something different,” he said.

“We’re seeing a lot of growth with existing tenants, as well as from companies that are leaving California as they look for less regulation, lower costs and a less expensive labor pool.”

As for investment, there isn’t much small-bay product available, according to Breinholt. But when a property does come to market, the seller will have 10 to 15 offers, he explained.

“There is a need for 6,000- to 30,000-square-foot spaces,” he added.

Despite growth and increasing demand from smaller industrial companies, it isn’t easy to develop smaller industrial product. Breinholt noted that properties that do come to market are averaging sales of $106 per square foot — up to $120 — while replacement costs range from $140 to $160 per square foot. “Land costs have gone up, though not tremendously since 2010. Construction and labor costs are also up,” he noted.

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Rob Martensen, Colliers International

Meanwhile, tenant improvement allowances at industrial projects have gone through the roof, Martensen said. “We used to see $10 to $12 per square foot, but today $15 is the almost absolute minimum on a 15,000- to 20,000-square-foot space. And we’re quoting a couple at $20 to $25 per square foot — and they are not crazy build-outs.”

Lydon said that some of the increase in pricing can be attributed to higher-cost materials, but much of it is related to tenant needs. “Phoenix is moving up the food chain; we are getting more value-add occupants,” he said, noting that REI is spending $200 per foot at its box in Goodyear, while food processors in the market are spending $350 per square foot.

A Bright Future

The Arizona market has a lot of momentum. The biggest challenge the market faces is the higher cost of transportation compared with some areas, but operating costs are much lower than in, say, Southern California. The area has a low risk of experiencing a natural disaster — “and eight months out of the year, it is awesome,” laughed Markham.

Phoenix is definitely showing up on more companies’ short lists for industrial space.

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