Kidder Mathews has released its latest report for the Phoenix industrial commercial real estate market and Phoenix continues to be a hotspot for industrial development. Here are some key takeaways:
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Phoenix industrial development highlights
- CONSTRUCTION activity continues to drive the market with 37.6M SF in 2024.
- VACANCY increased 440 bps YOY to 13.1%.
- YTD SALES VOLUME reached 23.4M SF.
Market drivers
- Phoenix continues to be a hotspot for industrial development as it has maintained a strong construction pipeline, averaging 8M SF in annual deliveries since 2022. This trend will continue well into 2025, with 21.8M SF of new projects currently underway. Year-to-date deliveries reach 37.6 SF, 19% higher than the total deliveries in 2023, which will continue to intensify the demand-supply imbalance as vacancy rates continue to rise.
- Vacancy increased by 440 basis points (bps) year-over-year (YOY) to 13.1%, while availability rates experienced an increase of 140 bps to 15.1%. However, compared to 3Q24, vacancy rates only grew by 140 bps, and availability by 20 bps.
- Despite the continued rise in vacancy rates through 2024 driven by new developments, direct net absorption continues to remain positive as logistics and manufacturing tenants are expanding their footprints. Direct net absorption in 2024 totaled 17.8M SF coupled with 5.7M SF in leasing activity.
- Rent growth in the Phoenix industrial market is slowing, with direct asking rents remaining steady quarter-over-quarter (QOQ) to $1.12 /SF NNN.
- Annual sales volume in 2024 has exceeded 23.4M SF, surpassing the total of 19M SF recorded in 2023, with most transactions involving buildings larger than 100K SF.
Economic review
- According to the Arizona Office of Economic Opportunity, Phoenix metro’s unemployment rate in October decreased 40 bps YOY to 3.3%. This compares to the state’s seasonally adjusted unemployment rate of 3.6% and national rate of 4.1%.
- The Federal Reserve has issued two additional .25% rate cuts this quarter following an initial .50% reduction in September 2024. These cuts are speculated to have a modest positive effect on stimulating new activity in the investment sales market.
Near-term outlook
- New construction is expected to slow down in 2025 to mitigate the supply-demand imbalance. However, build-to-suit developments are expected to drive growth as prospective tenants are continuing to search for larger space of at least 100K SF. Arizona will continue to attract many businesses that are looking to relocate or expand due to its strategic position as a hub for future industrial growth.
- Vacancy rates will continue to rise into 2025 until new supply is absorbed and new construction starts to decline.