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Friday, January 17, 2020

Phoenix industrial market finishes year with rental rates at a record high - AZ Big Media

The Phoenix industrial market finished another strong year, with vacancy rates hovering around the record low and asking rental rates escalating to a record high, according to a report from Kidder Mathews. The development pipeline at year-end hit an astronomical all-time high of current projects under construction, with the majority due to complete next year in 2020.  As such, developers remain bullish on Phoenix and show no signs of slowing down.

Affordability, a large labor pool, and connectivity to 33 million people in a single day’s truck haul are all contributing factors to the thriving Phoenix Industrial market. Strong demand generated from a growing and diverse mix of industrial tenants has compressed availability and vacancy rates to county wide lows in the last several years. While leasing activity has accelerated, new supply over the past year has narrowly outpaced demand. The rise in new supply is more than welcome as the market’s vacancy rate is hovering at the record low, the tightest the market has been in over 12 years. Additionally, a record high of 12.6 million square feet is currently under construction, with almost the entirety of the volume expected to be delivered in 2020, which the market has not experienced in over a decade. With relatively few barriers to development, favorable demographics, and a flourishing economy, Phoenix has emerged as one of the fastest growing industrial markets in the nation. Overall employment growth remains positive, as the Phoenix unemployment rate currently stands at 3.8% as of November, below the year-ago estimate of 4.2%. According to the Arizona Labor Statistics Office of Economic Opportunity, Phoenix metro’s total employment increased by 92,000 jobs year over year between November 2018 and November 2019.

Even with elevated levels of construction, healthy demand has maintained a vacancy rate well below the market’s historical average. Vacancy rates marginally increased from the previous year’s record low rate of 6.9%, posting at 7% in 2019. The Southwest submarket cluster posted the highest vacancy rate at 9.2%, while the Northeast reflected the submarket cluster with the least amount of vacant space at a tight 3.9%. Sustained demand has put steady downward pressure on vacancies since reaching a peak of 16.5% in 2010. Demand has outpaced new supply in the past eight years and as a result, vacancies have tightened substantially, falling by a staggering 930 basis points since the Great Recession. With almost the entirety of the 12.5 million square feet of industrial space under construction due to deliver by year’s end in 2020, it could certainly ease the compressing vacancies of the tightened market in the coming year.

Asking rental rates for all industrial properties ended at a record high in 2019 at an average price of $0.60 per square foot on a triple-net basis. After years of underperforming relative to the national benchmark, Phoenix rent growth has accelerated just as the national average has taken a breather, and rent gains in the region have been robust when compared to the historical average. Asking rates are highest in the Northeast submarket cluster at an average of $0.99 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 the Southwest region, which reported an average asking rent of $0.45 per square foot on a triple-net basis. The average asking rental rates within the various industrial products are also at an all-time post-recession high across the Phoenix market, with asking rental rates for warehouse and manufacturing space averaging $0.58 per square foot, while flex spaces are on the market for an average $1.06 per square foot.

Throughout the county, overall net absorption was strong at year end 2019 posting a healthy 7.5 million square feet of positive absorption. Manufacturing and warehouse properties gave way to the majority of the positive net absorption for the market, posting 4.3 million square feet. E-commerce, third party logistics, and manufacturing firms are capitalizing on the Phoenix market’s robust economy and fundamentals. Major move-ins throughout the year include Nike at Lincoln 40 Logistics for 902,000 square feet, Amazon at Phase II of 10 West Logistics Center for 570,000 square feet, and Z Modular at 6205 S Arizona Ave for 222,000 square feet.

Investors have become increasingly active in the local industrial market. Sales volume in 2019 reached a record breaking all-time historical high of 25.2 million square feet. Furthermore, the average sales price per square foot also jumped to a record high of $106/SF, the highest market price ever recorded. Healthy market fundamentals and attractive returns have generated heightened competition for industrial assets and are driving up values. Investors will continue to gain confidence in the Phoenix industrial market in the New Year. 

Notable Lease Transactions:

• Ferrero Rocher Chocolate, SWC Indian School & Cotton Ln, Glendale, 643,798 sf Leased

• States Logistics, 1755 S 75th Ave, Tolleson, 422,370 sf Leased

• Vital Pharmaceuticals, 4747 W Buckeye Rd, SW S of Buckeye Road, 376,760 sf Leased

Notable Sale Transactions:

• CBRE Global Investors LTD | 2500 W Frye Rd | Chandler | 191,000 SF | $72.8M or $381/SF

• Nike, Inc. | Lincoln 40 Logistics | Goodyear | 901,700 SF | $69.8M or $77/SF

• Lexington Realty Trust | Airport Gateway at Goodyear | Goodyear | 800,000 SF | $67M or $84/SF

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January 18, 2020 at 02:57AM
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Phoenix industrial market finishes year with rental rates at a record high - AZ Big Media
"industrial" - Google News
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