Anthony Lydon, JLL
Owners, investors and developers are bullish about the Phoenix industrial market – and for good reason. We occupy one of the most strategic supply chain locations in the West – a sweet spot between West Coast ports, manufacturing in Mexico, and alongside truck and rail routes leading product into the heart of the nation.
Add to this Governor Ducey’s mandate to grow Arizona’s trade volume with Mexico by 20 percent per year – not to mention Mexico itself being on the verge of becoming the world’s largest manufacturer – and you have a Phoenix market entering a new era of long-term growth.
This has expanded our already robust industrial construction industry, where design-build is hot and will likely stay that way, thanks to the 8 million square feet to 10 million square feet of industrial requirements seriously considering Arizona for their location solutions. For energy-centric companies with high employee head counts in particular, Arizona offers as much as a 30 percent to 40 percent savings proposition over higher-cost Tier 1 markets.
The West Valley has welcomed 10 million square feet of larger build-to-suit corporate projects looking for specialized footprints and visibility along I-10 in the past three years. These include 1.6 million square feet by Marshalls; 900,000 square feet by WinCo Foods; 600,000 square feet by American Furniture Warehouse; and 450,000 square feet by Living Spaces. We’re also in the early stages of a residential development rebirth, which has jumpstarted the 5,000- to 50,000-square-foot users in Phoenix’s suburbs.
Tech is expanding at the most rapid pace, and can be largely credited for leading Phoenix out of its recession. Most new tech deals are happening in the Southeast Valley cities of Tempe, Mesa, Gilbert and Chandler where highly educated workers have helped GoDaddy and Infusionsoft nab 150,000 square feet each, while; Apple is snatching 1 million square feet, Amkor Technology is taking 110,000 square feet; and Garmin is absorbing 60,000 square feet.
This activity has kept overall vacancy steady at 10.7 percent, encouraged a 12.8 percent rent growth and recorded more than 2 million square feet of year-to-date absorption, reflecting eight consecutive quarters of positive net absorption. This still leaves more than 32 million square feet of space available…so why continue to build?
Phoenix’s new industrial construction is filling a demand for high-functioning, high-quality space, as opposed to existing, older space. This demand has spurred projects like TEN, a 215-acre, $300 million, mixed-use business park that is being developed by Irwin Pasternack. Located at I-10 and 83rd Avenue, TEN is geared toward high-end, pre-leased, build-to-suits for national and international companies, with the goal of having at least one major, million-plus-square-foot industrial building under construction within 12 months.
Tenants with flexible needs will benefit from lower rents in the mid $0.30 per-square-foot range, but those wanting newer spaces could pay as much as $0.90 per square foot. This is nearly double Phoenix’s average $0.45 per square foot industrial rental rate.
Even these rates offer lower-cost solutions than cities like Chicago, Los Angeles or Dallas – all markets that are working 24/7 to keep up with e-commerce expectations while enjoying rising rents and decades-low industrial vacancy rates as a result. In comparison, Phoenix offers geographic and demographic advantages that – for the right users – make the Valley a worthy competitor and point to across-the-board industrial opportunity in the West’s sweet spot.
By Anthony Lydon, National Director, JLL. This article originally appeared in the August 2015 issue of Western Real Estate Business magazine.