Setting the stage for the year ahead, the Phoenix industrial real estate market’s performance in Q1 2019 only further reflected the consistent demand this market has shown cycle after cycle. Vacancy rates hit an all-time record low and asking rental rates soared to a new high. Leasing and sales activity continues to remain on solid footing, bolstered by a growing consumer base driving demand for industrial space among e-commerce and third-party logistics companies. Furthermore, while the market came off a record high of deliveries last year, the development pipeline still hit a post-recession record high with nearly 8 million square feet currently under construction, a number the market hasn’t experienced since 2007. With relatively few barriers to development and positive economic and demographic trends, Phoenix has emerged as one of the fastest growing industrial markets in the nation and we expect the market to remain robust in the coming year.
Vacancy rates posted a record low of 7.2%, 20 basis points below first quarter of last year which posted at 7.4%. Vacancies have tightened substantially, fallen by a staggering 900 basis points since the Great Recession. The Southwest submarket cluster posted the highest vacancy rate at 9%, while Pinal County reflected the submarket cluster with the least amount of vacant space at a tight 3.4%. With a heavy majority of the 8 million square feet of industrial space under construction due to deliver by year end, it could temporarily ease the compressing vacancies of the tightened market.
Asking rental rates for all industrial properties ended at a record high for the first quarter at an average price of $0.59 per square foot on a triple-net basis. Although Phoenix has trailed nationwide figures of over 6% in annual rent growth, annual rent gains have still been robust relative to the metro’s historical average, currently posting at a peak since the recession. Asking rates are highest in the Northeast submarket cluster at an average of $1.00 per square foot, as this submarket cluster is comprised of the larger share of flex and R&D properties as opposed to other industrial types, influencing the higher rental rates. By contrast, the lowest rates are found in Pinal County, which reported an average asking rent of $0.49 per square foot on a triple-net basis. The average asking rental rates in all industrial products are at an all-time post-recession high across the Phoenix market, with asking rental rates for warehouse and manufacturing space averaging $0.54 per square foot, while flex spaces are on the market for an average $1.08 per square foot.
As 2018 reflected a strong year in net absorption of approximately 7.5 million SF, the market continued to remain solid coming into the New Year, posting 761,535 SF of positive net absorption for the first quarter. General industrial properties gave way to the majority of the positive net absorption for the market, posting 950,000 SF. In terms of sales, more than $2.2 billion worth of assets traded last year, a record high, while pricing also climbed to an all-time high of $100/SF. While sales transactions in the first quarter posted at 3.5 million SF in volume, down from 4.6 million SF that transacted this same time last year, and the average sales price per square foot dipped slightly to $95/SF, these numbers still reflect the highest averages we’ve experienced in the last ten years, as investors still remain bullish in the Phoenix industrial market.
Notable Lease Transactions
Z Modular, 6205 S Arizona Ave, Chandler Airport, 222,000 sf Leased
States Logistics, 1755 S 75th Ave, Tolleson, 211,185 sf Leased
Chep, 9494 W Buckeye Rd, Tolleson, 186,336 sf Leased
Notable Sale Transactions
Oaktree Capital Management | Rio West Business Park | Tempe | 296,663 SF | $63.4M or $213.54/SF
Porges Properties | 1343 N Colorado St | Gilbert | 225,600 SF | $27M or $119.68/SF
Cohen Asset Management | 2200 S 43rd Ave | SW S of Buckeye Rd | 250,043 SF | $26.7M or $98.70/SF
Source: CoStar Data
For more information contact: Jerry Holdner, Director of Research, 949.557.5000