Construction activity remains scorching hot in the Metro Phoenix industrial market, with 10 million square feet in deliveries in the first quarter alone, according to a report from Kidder Mathews.

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Market Highlights

  • NEW DELIVERIES continue to soar with over 10M SF in YTD deliveries.
  • RENTAL RATES climbed to a new high of $1.15PSF NNN.
  • SALES VOLUME decreased YOY to 2.9M SF

Market Drivers

  • A staggering 31.6M SF of new deliveries came online throughout 2023, roughly 4.9M more SF than the previous high of 26.7M SF delivered in 2022. The Phoenix industrial market has added approximately 16% to the existing inventory since 2022. The construction pipeline remains very aggressive with year-to-date (YTD) deliveries just surpassing the 10M SF mark with over 37M SF currently under construction.
  • The injection of record level new deliveries in 2023 resulted in a year-over-year (YOY) uptick in both vacancy and availability rates. Vacancy increased by 560 basis points (bps) YOY to 10%, while availability rates grew by 310 bps to 14.8%.
  • Despite the overwhelming level of new construction, the Phoenix industrial market is generating plenty of demand. Net absorption for 1Q24 totaled positive 4.5M SF, indicating that demand is currently keeping up with the high velocity of new construction.
  • Sales volume fell 2.5% YOY to 2.9M SF, after two consecutive years of annual volume decreasing from the 43.6M SF trading hands in 2021.  The impact of higher interest rates coupled with the expectation that rates will drop in the near future have stalled investment activity. Despite that, demand for investments remains strong due to Phoenix’s market fundamentals.

Economic Overview

Near Term Outlook

  • Due to a surge in demand, average rental rates grew nearly 77% from 1Q21 to the $1.15/sf NNN in 1Q24. YOY gains have decelerated to a more modest 15% and are anticipated to normalize due to the large amount of new construction coming to the market.
  • The 37M SF in the construction pipeline is likely to continue to exert pressure on vacancy rates throughout the year. Over 24M SF of the product currently under construction is available for lease, further straining vacancy rates. Once construction activity cools, vacancy is expected to normalize as tenant demand catches up with the record level of new supply.
  • Economic uncertainty and higher interest rates limited sales volume to start 2024. In late March, The Federal Reserve held interest rates steady but signal plans for rate cuts before years end. If rates are cut, transaction volume is expected to pick up in late 2024.

The information in this report was composed by the Kidder Mathews Research Group.