Phoenix’s Industrial Market Poised for Success

While the industrial recovery in the Phoenix area has been slow, market indicators show signs of steady improvement. Average rental rates for the Phoenix metro industrial market have remained consistent, hovering around $0.52 per square foot for the past year. In the Southwest Valley, however, which constitutes almost one-third of the entire valley’s industrial space, average rental rates are much lower at $0.36 per square foot. Lease rates at Sky Harbor Airport are averaging about $0.59 per square foot, and $0.66 per square foot in the Southeast Valley. The highest average rental rates are predictably seen in the Northeast Valley, which reported an average of $0.85 per square foot. More than 2.9 million square feet was leased in the second quarter, representing 593 transactions. Leases remain steady compared to the first quarter of this year, but the rate will likely fall short of 2013 when 16.7 million square feet was leased.

Vacancy rates continue to fall after the spike seen last year. The second quarter of 2014 reported a 12.6 percent vacancy, down from the high of 13.2 percent in the third quarter of 2013. While a positive indicator, vacancy rates in the industrial sector swing on such a pendulum that it isn’t always a good measure of the market’s activity. Vacancy rates rose significantly last year, while net absorption suffered, thanks to the addition of large amounts of big box speculative space in the West Valley. Net absorption this quarter posted an impressive 3.6 million square feet, marking the fifth straight quarter of positive net absorption and the highest since 2005.

Sales volume increased in the second quarter of this year, totaling $254 million, up from $176 million from the first quarter. While still below the averages seen in the industrial sector peak of 2005 to 2007, it continues to make a steady increase back to a new normal. With the housing industry struggling to return as quickly as many predicted, the effects continue to linger throughout commercial real estate, particularly in the industrial sector, which is directly hit by the slowing of housing production. Agents in the market are optimistic that the industrial sector will take a well-deserved break from the roller coaster ride of the past few years as housing continues its slow recovery in the second half of this year. This, coupled with employment gains, should begin to create a solid foundation for the future.

New deliveries to the market totaled 1.8 million square feet in the second quarter, while an additional 1.7 million square feet is currently under construction. While this is slow compared to the deliveries seen last year, much of that space is still available and, overtime, will replace the outdated space. With the residential market showing signs of improvement, the industrial sector should follow suit in the second half of 2014.

By Patrick Sheehan, Vice President, NAI Horizon in Scottsdale, Ariz. This story originally appeared in the August 2014 edition of Western Real Estate Business magazine.

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