The Greater Phoenix industrial market remained steady during the first quarter, despite decreased net absorption relative to the end of 2018.  Construction activity has increased, but vacancy declined during the first three months, according to a report released by Colliers International in Arizona. 

According to the Bureau of Labor Statistics, Phoenix’ industrial employment increased by approximately seven percent from February 2018 to February 2019.  This has helped fuel usage of industrial space.  Net absorption for the first three months was 550,000 square feet, far below the 2.3 million square feet absorbed in the fourth quarter 2018. 

New leases for the quarter included Z Modular’s commitment for 222,000 square feet at 6205 S. Arizona Ave. in Chandler and States Logistics’ selection of 211,185 square feet at Logistics 75 building in Tolleson.

The vacancy rate fell to a seven-year low of 7.2 percent.  The industrial vacancy has hovered in this level since 2017, which is a noteworthy improvement from double-digit rates experienced as recently as 2015.  Vacancy rates in the Southeast Valley and Southwest submarkets rose slightly during first quarter, reflecting the impact of new projects coming online. The Southwest ended the first quarter with 8.8 percent vacancy and Southeast Valley finished the three months with a 7.3 percent vacancy. The Airport Area and Northeast Valley posted the biggest declines in vacancy.  The Airport Area now has a 6.2 percent vacancy and Northeast Valley boasts the lowest citywide vacancy with just 3.8 percent available.

Construction of new industrial space spiked to 7.3 million square feet underway.  Approximately 1.4 million new square feet was delivered during the first three months of this year.  The Greater Phoenix industrial market has added approximately seven million square feet to its inventory in the past 12 months. Construction activity in the industrial sector has averaged nearly 5.8 million square feet per year since 2013.

Rental rates increased approximately 1.8 percent during first quarter 2019.  Average asking rents for industrial space reached $0.57 per square foot per month, which is 3.4 percent higher than a year ago.  Rental rates are increasing the most in big-box distribution facilities, which have experienced a 4.1 percent rise in the past 12 months. Asking rents in the Southwest Valley increased to $0.40 per square foot during first quarter, which marks a 6.6 percent increase over the past 12 months.

Industrial property sales volume rose 44 percent over the first quarter to a total of $356 million.  The median price for industrial assets was $104 per square foot and cap rates decreased 40 basis points to 6.72 percent.  Investment sales volume is down from a year ago, but prices continue to rise.

Completion of new projects is expected to put pressure on the Valley’s industrial vacancy rate.  Large blocks coming online will likely lead us to finish 2019 with a vacancy rate around eight percent.  Net absorption is forecast to reach approximately 6.3 million square feet in 2019, but will lag behind the total of 7.5 million square feet of new construction being delivered.  Completion of new space and strong demand will push rental rates higher.  Colliers anticipates asking rental rates to rise approximately 3.0-3.5 percent during 2019.