The Phoenix industrial market continues to move forward by posting impressive figures in the second quarter. After last quarter’s slower-than- expected results that mirrored other commercial sector slowdowns, the industrial sector proved again its remarkable ability to rebound.
Vacancy, absorption, lease activity, sales activity and rental rates were all in positive territory. With so much product absorbed, demand is building for large distribution space, forcing spec building interest to the forefront. In fact, the first spec building in the post-recession economy has officially broken ground in the West Valley. Net absorption was the highest this quarter since 3Q 2006.
The industrial sector has been able to ride out the economic turmoil better than other sectors for a variety of reasons — changing patterns in online and brick- and-mortar shopping have forced retailers to lease or build regional distribution centers throughout the U.S.; a relatively small amount of outstanding CMBS debt; and lower-cost markets such as Phoenix, have benefitted from this. The amount of construction, while increasing, is still low historically and should push occupancy and rental rates up over the next year.
“Many variables in the Phoenix industrial market have turned positive over the past year and that is expected to continue. We’ll begin to see more build-to-suit activity as well as a return to spec construction as confidence in this sector grows,” said Matt DePinto, senior research analyst with Lee & Associates.
The Phoenix industrial vacancy has fallen to 13.4% from adjusted 14.2% last quarter. This 80-basis point decline brought the rate to its lowest level since 3Q 2008. This translates to a significantly increased absorption rate of 2,575,275 SF. This total is nearly ten times the absorption increase in the first quarter of 2012. Each building type in each submarket cluster showed positive absorption with the exception of the Southwest Valley Flex building sector with a modest decrease of 24,968 SF.
Construction starts are up more 500,000 SF compared with last quarter. Most of the remainder of the 3.14 MSF are large, build-to-suit buildings including Intel Corp., First Solar and Dick’s Sporting Goods. More speculative building will begin to take hold with the upturn in absorption and low cost to build. Completions this quarter totaled 326,674 SF. The largest building, MiTek’s manufacturing facility delivered 259,200 SF this quarter.
Rental rates were up only slightly from last quarter at $0.51 PSF, monthly (or $6.12 on a yearly basis PSF), but are moving in the right direction for the past
With increasing activity and the relatively low percentage of completions, rental rates should continue to rise. The Northeast Valley showed the largest increase from last quarter rising by $0.3 PSF, per month.
Leasing activity has improved over last quarter posting 3.7 MSF leased compared with 3.3M last quarter. However, the number of transactions has dropped. Overall activity remains steady, but below historic levels. Current activity has a direct effect on future quarters as move-in dates impact data as it is applied to the respective quarterly totals. The largest lease of the quarter was for a 358,830 SF renewal for Total Warehousing Inc. at 435 S. 59th Ave. in Phoenix.
Sales transaction activity was strong in the second quarter totalling $270M, over four times the total dollar amount in the previous quarter. Average price PSF was $62.19 which is the highest level in the past five quarters. The largest sales transaction was for two Class A distribution buildings at 4747 and 4750 W. Mohave St. in Phoenix for $131.6M. Price per square foot was $83.13. The buildings have a total of 1,583,781 SF. Cap rates lowered substantially to 6.7% compared with 8.6% last quarter. Lower risk has brought more investors to the market while prices are still relatively reasonable.
The Phoenix industrial market has weathered the economic conditions of the past few years very well compared with other CRE sectors. This is not to say that it has been a walk in the park, but the resiliency of this market sector and its ability to rebound has been extraordinary.
There is clearly momentum building as an eventual recovery will bring greater opportunities for those with the vision to see the possibilities. Those waiting on the sidelines could have missed some early benefits, but can still reap rewards as the market continues to recover.
