By Peter Batschelet, Principal, Lee & Associates
In a year of unknowns, hypotheticals and uncertainties, the Phoenix metropolitan area and Maricopa County were the complete opposite. In fact, 2020 was a record-setting year in this region’s industrial market for several reasons. For starters, there was nearly 14 million square feet of new construction delivered. This is twice as high as any year in the past decade and roughly equivalent to the deliveries from the past two years. In addition, Phoenix set record absorption numbers to the tune of, ironically, 14 million square feet. Meanwhile, vacancy rates have decreased to roughly 7.7 percent and rents continue to see moderate growth.
There does not appear to be an end in sight to the impressive growth. There is an additional 15 million square feet currently under construction. This space is both speculative development and build-to-suit opportunities from household names like Merit Partners, Prologis, Trammell Crow Majestic Realty and others.
Ecommerce sales represent roughly 15 percent of the national retail industry, which means there is plenty of capacity for additional investment and capital into the Greater Phoenix area based on our population and anticipated growth. There remains plenty of upside for the bulk ecommerce space to continue its aggressive trend as more individuals utilize online shopping both as a cultural progression and through necessity thanks to the pandemic. Thus, all early projections show this online shopping trend being above 20 percent in a short three- to four-year period.
Why are ecommerce companies choosing Arizona? Arizona has naturally been the benefactor of sunshine and a lack of natural disasters. Now more than ever, Arizona has also benefited greatly from California’s stringent business regulations and demanding taxes. Not only is Arizona’s sales tax significantly less, our income tax is roughly half of California’s. These factors are significantly impactful for businesses, investors and the everyday person. They highlight a pattern that is very likely to persist for years to come.
As businesses flock to the area, the western boundary of Metro Phoenix (outlined by the Loop 303 freeway) has been the epicenter of growth. The proximity to the California ports allows for a one-day turn around. On a side note, roughly seven out of 10 outbound routes back to California have freight rates of $400 to $550, while the others go back empty.
Growth, however, comes at a price and resources like concrete, asphalt and labor are wearing thin. During the peak years in the mid-2000s, Maricopa County pulled roughly 50,000 single-family permits per year and our population was in the 3.4 million range. In a turbulent 15 years, we have increased the county population to nearly 4.6 million people with an anticipated increase of another 1 million people in the next decade.
Housing starts of the past few years have remained in the low to mid-20,000 per year range with an 18 percent increase to nearly 29,000 in 2020. Simply stated, our labor force cannot keep up with the natural demand. Novice construction workers are nearing the $20 hourly mark, which is yet another cog in the wheel to increased construction costs. This, in turn, will continue to push rents and overall market pricing upward, especially when access to capital continues to remain at historical lows.