The Greater Phoenix industrial real estate market has heated up substantially during the second quarter as the city continues to lead the country in population expansion and job growth, according to a report from Colliers International. Businesses are expanding and relocating to the metro area, fueling the Phoenix industrial market and demand for all types of commercial real estate.
During the second quarter, Greater Phoenix posted industrial space net absorption of 1.4 million square feet. This was a 160 percent increase in absorption during the second quarter, compared to first. Some of the largest leases were National Indoor RV Center’s 107,625-square-foot space in Surprise; Walmart’s lease for 121,895 square feet in Tolleson and United Foods International’s lease for 109,620 square feet on 67th Ave. near Buckeye Road. Net absorption for 2019 is forecasted to reach 6.3 million square feet, which will fall below the amount of new construction being added.
New industrial projects under construction rose to 8.9 million square feet during the second quarter.
Development of new industrial space is particularly active in the Southeast submarket (2.8 million square feet) and Southwest (4.5 million square feet.) Approximately three million square feet of new space has come online during the first half of 2019. The city has added approximately 10 million square feet of new industrial space over the past 12 months. Approximately 7.5 million square feet is expected to be delivered by the end of 2019. Despite consistently high levels of new deliveries, the vacancy rates continue declining.
The vacancy rate overall decreased to a cyclical low of 6.8 percent. Industrial vacancy has been trending in the low to mid-seven percent level since the end of 2017. This is a significant improvement from the double-digit vacancies seen as recently as 2015. A handful of large projects are scheduled to come online later this year, which is likely to drive up the vacancy to nearly eight percent by the start of 2020.
Rental rates rose approximately two percent during 2019, up to an average of $0.57 per square foot. Big-box distribution buildings are posting the fastest rental rate increases. This category of space has experienced a 6.7 percent increase in rates during the past 12 months, reaching $0.41 per square foot in the second quarter. Rental rates are expected to continue rising as tenant demand increase and newer, more expensive product is coming online. Asking rents are expected to increase between 3.0 and 3.5 percent in 2019.
The second quarter brought 72 industrial property sales, which was an increase in transaction number. However, the volume decreased 12 percent over the quarter to $312 million. The median price was $96 per square foot, which is lower than $104 per square foot posted during the first quarter 2019. Cap rates continued to compress, decreasing 23 basis points during 2019 to 6.77 percent.
The industrial market outlook is strong for the near-to-medium term. The city is attracting industrial businesses and the infrastructure investment of the Loop 202 extension connecting the Southeast Valley and West Valley is a notable enhancement. Transporting goods into and through Greater Phoenix will be more convenient, which will make the city even more attractive to industrial users. The Federal Reserve’s retreat from raising interest rates will help elevate demand for commercial real estate assets as investors look for cash flowing vehicles and yields.