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Mid-Year 2013 Phoenix Industrial Leasing Slows As Investment Sales Rise

 

Over the past three years, the Metro Phoenix industrial market has confidently climbed its way back to recovery and historical norms in spite of hitting a bump or two.

The march has been impressive as the economy began to add jobs favoring industrial users. As larger product became scarce, build-to-suit and then speculative projects took shape. Quarter after quarter, the industrial sector posted gains in most measurements.

This quarter, however, leasing activity has hit its lowest level since Q1 2009 and rental rates have remained flat for over a year.

By no means has the bottom fallen out, but slow activity was reported in several product type categories and submarkets. There are several theories on the recent slowdown; tenants remain cautious because of uncertainty in the U.S. and global economies, fear of rising interest rates and business costs, and the lack of inventory in some areas.

“These are not irrational concerns and should be addressed before confidence can return,” said Matt DePinto, Senior Research Analyst with Lee & Associates Arizona. “Even so, there are a few good signs in this sector that should spur some activity in upcoming quarters,”

Industrial sales volume has been strong this quarter. Investors have become increasingly bullish toward this sector just as owner/user buyers have been since last year. Volume is four times what it was in the first quarter of 2013. Cap rates are trending lower as safer investments become a greater portion of sales inventory. Construction remains strong although down this quarter because of large deliveries, and with more than 3.9 MSF in the pipeline and more planned, a steady supply should bolster inventory.

Vacancy rates have retreated for the first time since Q1 2012 rising 70 basis points to 12.6%. Even with that rise, vacancy rates should begin to drop again. There is reason to believe that lower vacancy will continue its trajectory in spite of recent hiccups. Absorption, down considerably from last quarter’s 1.4 MSF, posted only a positive 44,928 SF this quarter.

Both vacancy and absorption are up this quarter which is counter intuitive, however, this anomaly is mostly due to more than 2 MSF of inventory that was delivered to the market this quarter while leasing velocity was down. This new inventory could add additional short-term pressure on rental rates, which have remained flat for some time. Rental rates stand at $0.50 PSF (monthly).

Deliveries are up nearly five-fold from last quarter to 2.185 MSF. The most sizable buildings were delivered in the Southwest Valley: Coldwater Depot, Phase 1 at 111 N. 127th Ave. in Avondale and Estrella Logistics Center, 563 S. 63rd Ave., Phoenix.

Construction is down this quarter because of large deliveries, yet remains strong with 11 properties with more than 3.9 MSF in the pipeline with more planned.

The top lease transaction for the quarter was the Summit Warehouse & Logistics renewal of 153,600 SF at Park 75 West, 7102 W. Roosevelt St. in Tolleson. Leasing activity has been trending down since the first quarter of 2012. There were 528 transactions totaling 2.8 MSF this quarter compared with an average of 4.3 MSF per quarter over the past year.

Sales activity was strong this quarter posting $227M in 90 transactions. Average price per square foot was $68.43, $12.95 PSF higher than last quarter’s average price PSF.

The top transaction for the quarter was an 11-building industrial portfolio purchase of the Broadway 101 Industrial Park in Mesa for $77M or $95.25 PSF. Cap rates were calculated to be 7.77%, down from last quarter’s higher 8.44%.

The Phoenix industrial market is a resilient one that should never be counted out. After a few stumbles over the past year, once the economy is running on all cylinders, this sector is sure to catapult to new heights. Even after a somewhat disappointing quarter, the short and long-term prognosis remains bright.

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