Positive Momentum in Industrial Should Build Throughout 2013
The Phoenix industrial market continues to forge ahead by posting mostly positive indicators, according to research from Lee & Associates.
From vacancy and absorption to construction activity, the industrial sector is riding a strong recovery. One only has to look at the market before the last recession to see similar indicators.
From a record-high 17.6% vacancy rate in Q1 2010, it has managed to turn in a sub-12% vacancy rate with nearly 19 MSF absorbed over that time period. The one area that has yet to rise to pre-recession levels is asking rental rates. Although rates have inched up slowly over the past year and made some gains in several sectors, they are still not where most expect them to be. It is still a concern for lessors and investors alike. Tenants still enjoy the modest rates, but will not do so for too much longer.
Construction activity remains strong, having grown steadily over the past two years and is the highest recorded activity since Q1 2008, but is still short of the exciting times of the commercial real estate run-up in 2006-2007.
Building type and size have changed enormously since then, as well. Currently, most construction is focused on build-to-suit, large distribution and manufacturing facilities with an average building size of 409,059 SF. In contrast, Q3 2007 when spec industrial condos and multi-tenant spaces were in demand, the average construction property size totaled 66,250 SF.
Today, with the increased demand for large distribution space, especially in the West Valley, several spec building projects have been announced while some have gone vertical. This trend will accelerate over the next few years.
As the Valley housing market continues to roar back, it has propelled the overall economy forward especially in the industrial sector. New homebuilding-related businesses that laid low during the housing collapse are returning to the market again. From cabinet, counter top and lighting manufacturers to door and window distributors, they are all scrambling for space to meet the increased demand.
Much of that smaller space, especially under 50,000 SF, had been languishing. The improving economy has brought these smaller players back to the market and should put a dent in the inventory. Additionally, more creative use of space by companies not pigeon-holed by a specific building type can find bargains and innovative solutions for their unique space needs.
The Phoenix industrial market posted an 11.9% vacancy rate, down 80-basis points from Q4 2012. This is the lowest posted vacancy rate since Q1 2008 when industrial vacancies began their steady rise. Net absorption remained strong this quarter at 1.579 MSF. First quarter absorption figures tend to bottom out after high activity at the previous years’ end. However, this is the best first quarter absorption rate since Q1 2007.
Deal velocity was somewhat weak during the quarter with just over 500 transactions and 2.3 MSF leased. There were 4 deliveries this quarter totaling 447,792 SF. There was an increase in construction activity from last quarter totaling 14 properties at 5.735 MSF. Asking rental rates remained essentially unchanged at $0.51 per square foot (monthly) although several submarkets showed increasing rates.
The largest industrial lease transaction for the quarter was 105,000 SF for Sound Packaging at 6725 W. Allison Rd., Chandler. The largest sale transaction for the quarter was the purchase by Digital Realty Trust of 3200 W. Germann Rd., Chandler for $13.8M from Amkor Technology, Inc.
The 201,388 SF property posted an allocated price per square foot of $68.83. Sales velocity posted a disappointing $86M in transaction volume this quarter compared to last quarter’s $187.4M.
The Phoenix industrial sector is in the strongest shape it has been in more than 5 years. Most market indicators are pointing in the right direction. Despite some uncertainty on the national political stage, investors, small business owners and lenders alike are ready to moving forward. Arizona’s economy has been rebounding well. With abundant land, low development costs and an aggressive campaign to lure out-of-state businesses here, the outlook looks strong.