The Phoenix industrial real estate market started the year with strong leasing activity, increasing development and steady rental rates. Despite 1.6 million square feet of positive absorption, new deliveries of over two million square feet caused vacancy to remain unchanged at 9.8 percent.

Kidder Mathew, an independent commercial real estate firm, expects increased competition for space and higher rates to continue throughout 2017, in spite of new construction, as a result of the strong economy and business expansion. The Phoenix unemployment rate sits at 4.5 percent, only a 10 basis point decrease from the 4.6 percent recorded this time last year.

The submarkets with the highest direct vacancy rates include Chandler Airport at 25.0 percent, SC South of Salt River at 20.1 percent and South Airport North of Roeser with 18.5 percent. Submarkets with the least vacant space include West Phoenix South of Thomas Road at 2.0 percent, West Phoenix North of Thomas Road at 2.5 percent and Central Phoenix at 3.3 percent. With over 4.5 million square feet of industrial space under construction, new deliveries in 2017 could temporarily ease the tightening market.

Asking rental rates for all industrial properties maintained the average price of $0.57 per square foot on a triple-net basis, which represents a 5.6 percent year-over-year increase in rates. Asking rates are highest in the Northeast cluster submarket at an average of $0.94 per square foot, because a larger share of the industrial stock there is comprised of flex properties. By contrast, the lowest rates are found in Pinal County, which reported an average asking rent of $0.33 per square foot, on a triple-net basis. Across the Phoenix market, asking rental rates for warehouse and distribution space averaged $0.54 per square foot, while flex spaces are on the market for an average $1.06 per square foot.

Flex properties continue to struggle as negative absorption of 125,000 square feet caused vacancy to increase to 14.3 percent. Meanwhile, the manufacturing and warehouse market was active this quarter, with over 713,000 square feet of positive net absorption lowering direct vacancy to 8.1 percent.

Investment sales activity was slow to start the year with dollar volume in the first quarter only reaching $78 million, a major decrease from the $333 million worth of industrial real estate that transacted in the fourth quarter. The median sale price for industrial investment assets was $76 per square foot. Median cap rates decreased to 6.9 percent from 7.1 percent this time last year.

Key Transactions

  • Essendant Co. — 1500 S. 71st Ave., Tolleson — 262,000 s.f. Leased
  • Danny Products — 10397 W. Van Buren St., Tolleson — 156,000 s.f. Leased
  • Enclose — 2225 S. 43rd Ave., SW S. of Buckeye Rd. — 118,000 s.f. Leased
  • Orbital ATK — 220 N. McQueen Rd., Chandler N/Gilbert — 60,000 s.f. Leased
  • Starks Logistics — 221 N. 48th Ave., SW N. of Buckeye Rd. — 50,000 s.f. Leased

Source: CoStar Data