The Metro Phoenix industrial market has been climbing its way to recovery for the past few years, but the activity of 2012 showed the strongest signs of diversified activity of a healthy marketplace. While overall net leasing was down slightly from 2011, the city benefitted from an abundance of medium and large transactions reflecting many types of industrial users leasing and buying throughout the city. This diversity indicates overall health — and not just in our traditional big box arena. In several strong submarkets, we saw owners pushing back on users’ terms due to improved portfolio and individual property activity.
The city’s big box hub of Southwest Phoenix experienced continued strong activity with a variety of notable leases and property sales. We saw a shift to speculative construction and actual groundbreakings taking place on multiple projects. Phoenix has more than 2.6 million square feet of industrial space under construction, with more than 2.2 million of that being situated in the Southwest area. Overall net absorption in that area totaled more than 1.3 million square feet in 2012, leading to a shortage of available large facilities following three years of top eight national leasing and sales activity.
The overall net absorption of space in 2012 totaled 4.9 million square feet across the city, down from about 6.1 million in 2011. However, the absorption was composed of more mid-sized transactions in a variety of types and locations, not just in our big box market. Tenants signed about 1,838 industrial leases in 2012, compared to 1,757 leases in 2011. The average lease size in 2012 was 17 percent smaller than 2011, with the top 10 leases of 2012 comprising 51.8 percent of the total overall net absorption. The top 10 leases in 2011 comprised 62.3 percent of overall net absorption in Phoenix, and were mainly focused in the Southwest Valley.
During 2012, Southeast Valley submarkets nearly matched the Southwest for absorption, posting nearly 1.3 million square feet of overall net absorption. Deer Valley produced the top four of 16 submarkets with absorption of 800,000 square feet. This was due to notable leasing and sales activity in every product type, including back office, flex, warehouse and freestanding buildings. The Metro Phoenix overall vacancy rate dropped to 11.8 percent at year-end 2012, compared to 12.9 percent a year ago. This was the lowest rate in five years.
The return of construction-related tenants is another sign that Phoenix is rising from the recession. During the downturn, we witnessed the demise or downsizing of many industrial tenants that were dependent on the residential construction industry. Residential construction-related firms comprised a large part of industrial tenancy in this market. For the first time in five years, we are now seeing this category of user leasing again. Flooring companies, lumber distributors and furniture warehouses are once again leasing facilities from 5,000 square feet to 100,000 square feet. While we are seeing an uptick in new home construction, this growth could be attributed largely to the boom in multifamily residential construction and the demands of that industry.
Multiple users of varying industries are now vying for very few 100,000-square-foot and larger spaces in markets like Tempe, Chandler and Scottsdale. We’ve seen tenants in a multitude of fields, such as aerospace, distribution and manufacturing, on the hunt for these spaces. Some of the tenants are local and expanding, while others are new to the Phoenix market entirely.
Phoenix has also seen some strong niche plays for small user/owner buildings. Fewer lender-owned buildings are hitting the market. The ones that do are rapidly being sold at increasing market prices with competition from multiple buyers. Prices in strong submarkets have surpassed replacement costs, and spec construction will meet the demand in 2013. Investors that acquired distressed properties in the Scottsdale, Deer Valley, Sky Harbor, Chandler and Southwest submarkets have successfully rented and/or flipped their projects.
With strong fundamentals in place, capitalization rates are dropping. This has allowed investors to focus on value-add opportunities beyond core properties. Some of these require modernization, while others will warrant the construction of future phases that were delayed in the recession.
We project that 2013 will see increased construction in Phoenix. As evidenced with the results of the past three years, the market continues to progress with strong fundamentals and leasing, sales and build-to-suit transactions. New construction has also been very limited in this recovery, compared to previous recoveries. During 2012, the market only added 1.86 million square feet of space. However, this was still the most space added in five years, yet still a very cautious number for a market with more than 290 million square feet of product that was coming off 14 million square feet of leasing and sales transactions. Lending struggles will likely keep overbuilding under control as we continue to create new opportunities in all product types to satisfy growing demand from local and regional users of all sizes.
— Steve Sayre, Senior Director of Industrial Properties, Cushman & Wakefield of Arizona