Expanding online commerce drives growth in Phoenix industrial market
The Greater Phoenix industrial real estate market remains healthy, despite business conditions during the pandemic, according to a report from Colliers International. America’s growth in online purchasing is driving expanded demand for warehouse/distribution space.
Net absorption of industrial space peaked at more than two million square feet in the second quarter. This marks the fifth consecutive quarter with net absorption exceeding one million square feet. Year-to-date the market has posted 3.7 million square feet of positive net absorption. Net absorption was dominated by warehouse space in the Southeast and Southwest areas. During the quarter, Lucid Motors committed to 479,207 square feet of space in Tempe. Additionally, Amazon signed a lease for 164,486 square feet in Chandler. Leasing activity slowed significantly in April as the nation paused and evaluated effects of the Coronavirus, but virtual tours and tenant interest picked up again in May and June.
The number of leases signed during second quarter decreased by 8.7 percent from first quarter. Tenants approaching their lease expirations have largely chosen to sign short-term renewals as they assess long-term impact of the pandemic on their businesses.
The vacancy rate for Greater Phoenix industrial space remained low at 7.7 percent at the mid-year point. This marks a continuation of sub-10 percent vacancy that began in third-quarter 2015. The vacancy rate rose 10 basis points during the second quarter and has risen 70 basis points over-the-year. The Southwest Valley submarket remarkably delivered more than 2.4 million new square feet of space to inventory during the second quarter, but simultaneously experienced a 30-basis point decline in vacancy. The largest factor in this submarket was Amazon’s lease of 1.1 million square feet at TEN Warehouse in Tolleson. Supply of spaces larger than 150,000 has tightened in the market. Only 15 existing buildings can handle this size of tenant in the Airport, Southeast and Northeast areas. There are only eight buildings that can accommodate a tenant requiring 200,000 square feet.
This relatively low vacancy is noteworthy when you consider that the Greater Phoenix market delivered 3.4 million square feet of new space during second quarter. Construction activity rose to 11.6 million square feet as developers work to provide inventory for strong demand in the market. Second quarter marks the second highest quarter of inventory under construction in the past 10 years. Approximately 9.8 million of these square feet are located in the West Valley. Land in the Southwest Valley along Loop 303 is being scoured by developers who are creating primarily warehouse and distribution space on those parcels. The South Mountain Freeway 202 expansion is creating more options for businesses doing a site selection, now tenants in the East Valley can look at options in the West Valley and stay within 20-30 minutes of vital campuses in the East Valley.
The Northwest submarket has become another top area for construction with 5.9 million square feet underway. Park 303 near the Loop 303 and Glendale Avenue accounts for 1.1 million square feet of new distribution in the submarket, which is 100 percent vacant. The Loop 303 area has become highly desirable as businesses migrate north from Interstate 10.
Rental rates continued to rise, increasing nearly 4.2 percent over-the-year and up 1.16 percent over-the-quarter. The average asking rent reached $0.58 per square foot, with the Airport submarket posting the largest rental rate increase this year of 5.9 percent to $0.71 per square foot. The largest increase over-the-quarter was experienced in the Northwest submarket with 4.4 percent to $0.60. Rental rates are expected to elevate further as demand remains strong and new projects are delivered. Limited options for large contiguous spaces outside of the West Valley will fuel competition and rising rates.
Investment sales of industrial properties during second quarter decreased from the sizable amount of large multi-property transactions that took place during the first three months of the year. Both sales volume and the number of transactions decreased significantly during second quarter. The quarter posted just $320 million in volume, but the median price per square foot increased 4.2 percent to $116 per square foot. The Chandler building at 2550 N. Nevada St. sold twice during 2020. The 164,486-square-foot property was originally purchased for $118 per square foot by Walton Street Capital. Following Amazon’s full-building lease, the project was quickly sold for $230 per square foot totaling $38 million. There were only two multi-property sales during second quarter.
The industrial market sector will prove to be the healthiest as we navigate the pandemic. Projects under construction are moving forward as planned with the only slowdowns being caused by delays in construction material supply chains. The rapid change in supply chain and increase in online shopping has created intense focus on the warehouse sector. The Greater Phoenix industrial market was already strong before the pandemic, but changes to lifestyle during the crisis have created even more demand for industrial space.