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The Phoenix industrial market continues its convincing march toward recovery by reaching several milestones. As a more resilient sector during the recession, the industrial market was not plagued with as much bad debt and CMBS loan defaults as other sectors. Industry experts concluded the industrial sector would recover faster as favorable economic conditions such as durable goods orders and manufacturing output favored the industrial market early. The sector has posted 10 consecutive quarters of positive absorption dating back to 2010. Vacancy rates have returned to levels not seen since the third quarter of 2008. This positive direction reflects a rebound in U.S. exports, consumer spending and online purchasing, which has led to a high demand for large distribution space in which there are few options in Phoenix.
Confidence in the industrial market – and in Phoenix in particular – has brought renewed interest in developing new projects. Most new construction is a combination of build-to-suit manufacturing space and several new speculative projects to meet the demand for distribution space of more than 100,000 square feet.
Industrial investment sales transaction velocity remains quite strong even though it’s declined from last quarter’s significant level. However, price per square footage has increased once again this period, just as it has quarter after quarter since the third quarter of 2009. Industrial land sales transactions were also strong this quarter, posting their best month in a year and second best quarter since the third quarter of 2008. Rising mortgage capital and improving rates have helped to bolster this sector as well.
Unfortunately, the industrial sector isn’t completely rosy. Rental rates, despite slight improvements in several areas, continue to struggle to gain momentum overall. Leasing activity remains sluggish and has slowed by 28 percent compared with last quarter. This is the lowest third-quarter total since the third quarter of 2008. Larger leases tend to make up a larger percentage of leasing activity here, while leases of less than 100,000 square feet are proving to be less robust. The valley’s industrial vacancy settled at 13.2 percent, a 20-basis point drop from last quarter, and the lowest overall vacancy rate since the third quarter of 2008. Absorption settled at a positive 758,573 square feet, a far cry from last quarter’s nearly 2.6 million square feet of space, however. Year-to-date absorption is at 3.5 million square feet.
There are 11 projects totaling 3,857,700 square feet under construction this quarter. Coldwater Depot, a 56-acre project in Avondale, was the first spec project to announce plans to build a 603,863-square-foot distribution building since the recession began. There were no deliveries of industrial product this quarter. Rental rates were flat this quarter at $0.51 per square foot. The Northwest and the Southeast submarkets experienced the most rental growth compared to other submarkets. The Airport Area rates showed the greatest decline. In the largest lease transaction for the quarter, States Logistics Services renewed its lease for 276,336 square feet at 10397 W. Van Buren Street in Tolleson.
There were 96 sales transactions totaling $223.6 million in this area. This is down from last quarter’s sales of more than $350 million. However, this has been the second strongest quarter since the fourth quarter of 2008. Average price per square foot was posted at $63.38, the highest in three years. Actual cap rates have fallen to 6 percent from 6.7 percent last quarter. The largest sales transaction of the quarter totaled $90.29 million for 1,267,110 square feet of Class A distribution space at 800 N. 75th Ave. in Phoenix. The buyer was Industrial Income Trust, a private REIT out of Denver. Price per square foot was calculated at $71.26.
The industrial market outlook remains positive as the Arizona and U.S. economies continue to improve. Expected population increases and better-than-average employment figures have ushered in renewed optimism. Greater speculative development in the Valley has taken hold to fill gaps in inventory. This has not only boosted optimism, but created more investment opportunities for the community as well. Lower unemployment figures, higher consumer spending and available inventory at low interest rates all add up to a sector that is moving confidently in the right direction.
— Matt DePinto, senior research analyst, Lee & Associates Arizona