Phoenix industrial market expected to keep robust pace through 2019

Above: Trammell Crow Company Phoenix and its partner, a fund sponsored by CBRE Global Investors, recently unveiled plans for a new industrial project in Phoenix, known as Park Aldea. Real Estate | 16 Oct |

The Greater Phoenix industrial market remained strong through third quarter, posting net absorption of approximately 1.23 million square feet.  Continued job growth has fueled leasing activity and construction of new developments.  Colliers forecasts the robust activity to continue through 2019.

Greater Phoenix ranks in the top five U.S. large cities for employment growth.  Net absorption during third quarter brought the year-to-date total of net absorption to just over three million square feet.  Warehouse, flex and distribution spaces experienced the strongest net absorption through third quarter.  Sendoso leased 181,325 square feet on 61st Avenue and Integrated CBD leased 154,813 square feet on South 48th St. in Tempe.  Net absorption is expected to total approximately 6.5 million for the entirety of 2019, lagging behind the amount of new construction in the market. 

Development of new projects slowed slightly during third quarter to 7.9 million square feet under construction, down from 8.9 million in second quarter.  Construction of new projects is still quite active, especially in the Southeast and Southwest portions of the metropolitan area.  This new construction is putting upward pressure on vacancy, which has posted minor 10 to 40 basis point increases over the quarter.  This is especially true in warehouse and manufacturing product types.  Approximately three million square feet of new space has been delivered since January.  Demand for space has been strong enough for the market to bring 13 million square feet online since first quarter 2018 and maintain vacancy decreases. 

Vacancy across all submarkets remains below 10 percent.   The overall vacancy rate hit a cyclical low of 6.8 percent.  Manufacturing space holds just 3.3 percent vacancy, which is its second lowest recording since late 2017.  This below 10 percent vacancy is part of a trend that began in 2017 and is a significant improvement from double-digit vacancy rates experienced as recently as 2015.  Vacancy is expected to creep up a bit by the end of the year to approximately 7.5 percent as a group of large projects come online in the last quarter.

Rental rates for industrial space have risen 3.6 percent during 2019, but remained flat for third quarter, at $0.57 per square foot.  Big box distribution space rents are rising at the fastest pace, posting an increase of 4.6 percent in the past 12 months.  Rents are expected to push higher as tenants demand newer, more expensive product that is coming to market.  Asking rents are expected to rise approximately 3.0-3.5 percent on average during 2019.

Sales volume increased 121 percent of the quarter and 29 percent over-the-year.  This was the highest third quarter sales volume since 2016 with a total of $691 million in sales.  The median price for industrial space settled at $104 per square foot in third quarter, mirroring prices in first quarter.  The number of transactions also is outpacing 2018 with a total of 210 deals completed through third quarter, which is a 16 percent increase over this period 2018.  Cap rates have been compressing over the year and settled at 6.18 percent at the end of third quarter. This marks a 59 basis point decline during third quarter and the lowest average cap rate in the industrial sector since 2016.

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