Phoenix’s industrial inventory is undergoing a period of growth due to the delivery of 2.2 million square feet of new product in the third quarter of 2019 and more than 4.7 million year to date (as of late November). In fact, the market has seen the highest amount of total industrial development year to date since 2007.
While these deliveries have increased the industrial vacancy rate slightly, the overall vacancy rate for the area remains low at less than 7 percent. Absorption has been strong and is expected to remain so for the near future. Rental rates also continue to rise, though they are still at a considerable discount to many other West Coast markets.
Steve McKendry, DAUM Commercial Real Estate Services
A high amount of development activity is still occurring, particularly in the southern portion of Phoenix. Much of this development is speculative rather than build-to-suit, which indicates developers are confident in the demand for industrial space in this market.
Major factors for our growth have been significant job creation and in-migration of both residents and businesses, which have led to growth in industrial and construction jobs in the region. In fact, Greater Phoenix remains one of the top five metros for job creation in the country.
Average sale prices are hovering at around $110 per square foot, while cap rates continue to compress as a reflection of the market’s strength.
Scarcity of industrial land is an issue that has cropped up relatively recently for the Phoenix market. Developable industrial land in the Sky Harbor Airport, Tempe, Deer Valley and Scottsdale Airpark submarkets is particularly scarce. As developers see the great potential of this secondary market and step up their deliveries, land inventory is decreasing rapidly and will continue to be an issue for developers going forward.
There is still a considerable amount of undeveloped farmland west of Phoenix and in the East Valley. However, much of it doesn’t have the proper infrastructure or utility connections for solid industrial development. This exacerbates the dearth of available land — a problem that plagues many Western markets.
Industrial properties in just about every market in the country are experiencing strong demand due to ecommerce, and this demand shows no signs of stopping. The industrial sector will only continue to grow as retailers recognize the value of an omnichannel approach to sales. We are very optimistic about this sector’s fundamentals.While they may face a bit of the slowdown or leveling off in the next couple of years, we don’t anticipate a major recession.
Phoenix is particularly well positioned because of its secondary market status. If a slowdown or recession were to occur in 2020 — and many of the primary markets remain too pricey for owners, tenants and developers — more affordable markets like Phoenix will look all the more attractive to these stakeholders and will continue to draw them in. With this in mind, a slowdown could ultimately work in the market’s favor.
— By Steve McKendry, executive vice president and Phoenix office branch manager, DAUM Commercial Real Estate Services. This article first appeared in the January 2020 issue of Western Real Estate Business magazine.