The Greater Phoenix industrial market continued improving during the first quarter of 2018, though net absorption has lagged behind 2017 levels.   The remainder of 2018 will be a time of tenant move-ins and construction activity.

Net absorption reached almost 1.2 million square feet in the first quarter, marking the seventh straight quarter of net absorption exceeding one million square feet.  Several large leases are scheduled for move-in this year, including the 800,000-square-foot build-to-suit facility for online pet retailer,  An increase in spec inventory will likely generate additional leasing volume.  Experts indicate that improvement in the housing market will drive additional demand for industrial space.

Vacancy throughout the Valley fell to 7.6 percent during first quarter, which is the lowest in more than a decade. First quarter was the sixth consecutive quarter for vacancy improvement. The Southwest Valley vacancy rate dipped to 7.5 percent during first quarter, which is the lowest vacancy in this area since late 2006. 

Asking rental rates rose to $0.58 per square foot, per month during first quarter, which is 2.5 percent higher than one year ago.  New construction pushes rental rates higher as projects come online.  Asking rents are forecast to advance more than three percent in 2018, largely influenced by leasing of large spec buildings that will come online this year.

The first quarter saw delivery of 710,000 square feet of new space.  More than 6.2 million square feet of space is under construction, more than 3.5 million of that is speculative space.  Construction is expected to be quite active throughout 2018, particularly in the West Valley along Interstate 10 and the Loop 303.  One of the largest spec developments in recent years was started during first quarter.  The 1.1-million-square-foot TEN Distribution Center is the first building in a project that ultimately could total more than 3.6 million square feet. The project is located in Tolleson, immediately south of Interstate 10.

Sales of industrial properties declined in first quarter, which is typical for our market.  First quarter sales of industrial properties posted a median price of $97 per square foot, which is a 17 percent rise from the median price in 2017.  Cap rates averaged 6.8 percent during the first three months of this year, which reflects a heightened investor demand for local industrial assets. Prices tend to be highest in owner-user transactions, but prices are also pushing higher in larger, investment transactions.

Despite a slightly slower start to 2018, the industrial market remains quite strong.  Two trends are expected for the duration of 2018.  First will be an increase in spec development, which is posting a 25 percent increase over a year ago. Second will be an emergence of rent growth.  Net tenant demand has outpaced development in seven of the past eight years.  Vacancies have tightened, which will be a driver of rental rates.