It is important to understand that the mid-2000s did not reflect a sustainable level of industrial leasing activity. Real estate in general — and Phoenix in particular — has always been subject to cycles.
The past few years have seen a flight to quality with tenants moving from older buildings to newer, more modern facilities. They were able to lease new space at bargain rates that were at or below what they were paying for their older facilities.
The initial signs of an improving economy have already manifested themselves in an industrial demand increase. This trend is expected to continue and gradually gain momentum, albeit not along the same steep trajectory of recent growth patterns.
At the end of the first quarter of 2012, the national industrial market consisted of 289,117,054 square feet. It currently has 39,089,600 square feet of vacant space. At the beginning of 2011, the industrial vacancy rate stood at 15.5 percent. With 6,993,112 square feet of positive net absorption in 2011 and 302,468 square feet in the first quarter of 2012, the vacancy rate now registers at 13.5 percent. Despite positive absorption, the overall average rental rates have seen little improvement over 2011 with the exception of large distribution space rates in Southwest Phoenix.
Many were ready to pronounce the manufacturing industry DOA, as off-shoring to cut costs was the trend de jour. However, renewed patriotism,greater production efficiencies at home and higher transportation costs have resulted in manufacturing job growth and increased absorption in this industrial category.
In the push to develop alternative energy resources, Phoenix has attracted a host of solar energy panel manufacturers who have leased nearly 2.2 million square feet of space. In addition, semiconductor, electronics and consumer product companies have added another 1.8 million square feet.
With increasing retail sales and record levels of import activity at the California ports, Phoenix had a significant amount of large distribution transactions over the past 18 months. This included three deals with Amazon totaling 2.9 million square feet, bringing the company’s total here to 4.5 million square feet. Retailers like the Gap, TJ Maxx, Dick’s Sporting Goods and Home Depot added another 1.5 million square feet mostly to Southwest Phoenix, which accounted for nearly 60 percent of all net activity. This submarket now has a very low vacancy rate and is unable to accommodate large users in existing facilities. Thus, rental rates for larger, high-quality facilities have increased from the range of $0.22 to $0.24 per square foot to $0.32 to $0.34 per square foot within a year. This represents a 50 percent increase.
Smaller local tenants are still uncertain as to whether the initial signs of improvement warrant long-term financial decisions in the real estate industry. For some, even though their businesses are faring well, they are making due with current facilities. Much of this smaller tenant activity is reliant upon the homebuilding industry, which must continue to recover for this leasing to improve.
Phoenix has certainly not flat-lined, and the market is starting to gain momentum. We seem to be on the tail end of the bust; and Phoenix is known to heal and heal well. After all, we have a reputation for rising from the ashes.
— Aric Adams, vice president, industrial division, Voit’s Phoenix office