Industrial Owners Delight in Phoenix’s Thriving Market

by Camren Skelton

The Phoenix industrial market is thriving, despite more than 5.6 million square feet of new construction set to deliver this year. There is enough demand in this market to keep the average vacancy rate at a near eight-year low of 9.7 percent, while absorption is on pace to exceed 6 million square feet for the third year in a row.

Steve Larsen, JLL

Steve Larsen, JLL

Tenants have more choices than ever thanks to all this new inventory. Many are making a flight to quality, upgrading to next-generation space featuring wide column spacing and clear heights of up to 36 feet. This is particularly valuable in the West Valley, where large, efficiency-focused, third-party logistics firms and e-commerce companies must maximize how they manage vast amounts of product.

Some of these needs are so specific that corporations have opted to custom build, as is the case with the recently completed 400,000-square-foot REI distribution center and the 384,377-square-foot IRIS USA facility, both situated in Surprise. These projects rank as the Valley’s two largest owner-builder completions of the year and have propelled the Northwest submarket — the third smallest industrial submarket in metro Phoenix — into the “hot” category.

Meanwhile, owners and builders have gotten more creative in centralized locations like central Tempe and the Airport where land prices can be as high as $9 per square foot and a lack of developable parcels exists. At 923,728 square feet, Airport I-10 was developed on one of the last available parcels near Sky Harbor International Airport. It has been welcomed with robust lease activity by companies like Anixter (63,470 square feet), DHL Express (40,529 square feet) and Pilot Air Freight (31,824 square feet). In contrast, in order to build Opus Airport Center and 10 Sky Harbor — also in the airport area — developers had to tear down old buildings and take advantage of large yards to develop their new projects.

Demand was so high at Liberty Center at Rio Salado in Tempe that Liberty Property Trust was able to pre-lease 91,000 square feet. The firm was also able to sign an additional 86,000-square-foot lease within just months of delivery. Freeway visibility and modern construction are a boon for these developments, but an even larger draw is their coveted central location, a superior workforce and the simple lack of options in the metro market.

This shortage has pushed many developers to the suburbs. In the Southeast Valley, new projects include the 225,600-square-foot AZ|60 development near Baseline Road and Country Club Drive, as well as the 631,000-square-foot Park Lucero in Gilbert, both of which are actively leasing at a solid pace.

Along with demand, rental rates have increased to $0.55 per square foot for warehouse and distribution space, and to $0.68 per square foot for manufacturing space. Asking rents at new, modern projects are often well above this average. Values frequently reach $100 per square foot and higher for premium space — a big jump from the $50- to $70-per-square-foot pricing of the past six or seven years. Investors struggle to find upside potential at this new price point. Owners, on the other hand, are thrilled. Their buildings are filling with long-term tenants, cash flow is strong, and most are more than happy to hold on and ride out the new cycle.

— By Steve Larsen, Vice President, Industrial, JLL. This article first appeared in the September 2016 issue of Western Real Estate Business.

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