Industrial Sector Update
September 8, 2014
By Bryon R. Carney
The nation’s industrial sector has seen restored confidence in 2014 partially due to a continued increase in employment, the housing market and a rise in industrial production. The metro Phoenix industrial market has benefited from this increase in confidence, earning the nation’s top spot for overall net absorption through the first half of the year. Phoenix posted an overall net absorption of 6.56 million square feet through June 2014, which is almost double the overall net absorption of industrial space of the 3.3 million square feet total for metro Phoenix for all of 2013. Two companies accounted for the majority of the absorption with second quarter occupancy: GT Advance Technologies/Apple moving into 1.3 million square feet in Mesa in the former First Solar facility and WinCo moving into an 800,000 square foot warehouse/distribution facility in Southwest Phoenix.
After three and half years of growing demand for industrial space, the vacancy rate has fallen from its recent high of 16.7% in 2009 to 11.7% through second quarter 2014. Vacancy rates in Scottsdale and Chandler are even lower at 7.8% and 9.8% respectively. General industrial and warehouse/distribution space continue to be the preferred product type with positive absorption and declining vacancy rates. At the same time, flex space has lagged in the market resulting in vacancy rates above 20%.
The one area that has not seen much movement is rental rates. Overall, average asking rental rates for metro Phoenix industrial properties has held steady over that past four and half years. Since 2010, average asking rental rates in the Valley have bounced between $0.49 and $0.52, per square foot. The anticipation of rents increasing is greatest in those high demand submarkets, especially those experiencing new construction like the Southwest and Northwest Valley.
Construction of industrial projects also continues to increase, as developers move forward to break ground on build-to-suit and speculative industrial properties. At the end of June 2014, there was approximately 3 million square feet of industrial space under construction in the Valley, and that included 10 new projects that broke ground during the second quarter. Those projects are split evenly between build-to-suit and spec, with five of each starting construction during the quarter. EastGroup Properties broke ground on two speculative warehouse/distribution buildings in Chandler that will add ±119,933 square feet to that market, while Wentworth Property Companies (WPC) and Clarion Partners broke ground on Airport I-10 Business Park. Construction began on the first phase, ±603,656 square feet in a three building speculative warehouse/distribution project. WPC has also announced plans for 10 West Logistics Center, a 1.3 million square foot warehouse/distribution center in the Southwest Valley at Van Buren and 59th Avenue. Three projects are under construction in the Northwest Valley: Mack is developing Pinnacle 7, a two building 168,856 square foot general industrial project, Spectrum Deer Valley is a 218,937 square foot, three building project by Trammel Crow and Sunstate broke ground for Union Hills Business Center, a 113,880 square foot general industrial complex.
While much of the construction activity since 2012 has been mostly warehouse/distribution projects, 400,000 square feet plus, we are seeing more announcements for mid-size buildings, from 50,000 to 300,000 square feet. According to the Greater Phoenix Economic Council, there were 35 new industrial prospect companies looking for space over 200,000 square feet in the market between July 2013 and July 2014. During that same period, 35 additional companies were looking for space between 75,000 and 199,000 square feet. Demand from small to mid-size industrial users is key for our market to continue to see positive growth.
Investors remain looking for value, which creates an overall perceived value in real estate assets, including metro Phoenix industrial properties. Historically, investors first considered prime distribution areas such as Los Angeles/Long Beach, New Jersey and Chicago. However, with a scarcity of available properties in those areas, Phoenix has become a prime location for investors. Our city’s proximity to major distribution centers, strong labor markets and lower operating costs all add up to strong market fundamentals that attract investors.