The Greater Phoenix industrial market delivered a historic 27.9 million square feet of new space during 2023, which drove vacancy rates up in the area, according to a report released by Colliers in Arizona. Vacancy rose to 6.7 percent at the end of fourth quarter, which marks a 370 basis point rise year-over-year.
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Strong pre-leasing of those delivered developments helped fuel the 3.1 million square feet of net absorption posted during fourth quarter. This marked the 15th consecutive quarter of net absorption exceeding 1 million square feet. Net absorption for 2023 totaled 15.9 million square feet, which was down 41.3 percent compared to the record-breaking year of 2022. Velocity of leasing declined during fourth quarter, making those three months the slowest for leasing since 2020. The average transaction during fourth quarter was 56,156 square feet, which was decreased by 44.9 percent year-over-year. Big box space struggled the most during 2023 with only two direct landlord transactions over 500,000 square feet signed, compared to 10 such transactions in 2022. The largest lease of the quarter was Saddle Creek Logistics Services committing to the entire building of The Cubes at Glendale Building E.
Industrial vacancy has reached its highest level since year-end 2020. However, the average five-year vacancy rate prior to the boom in 2020 hovered at 7.2 percent. Greater Phoenix benefits from strong occupancy and is not seeing large tenants vacate space, as they are in other property categories. During the second half of 2023, the market delivered a record breaking 19.5 million square feet. We have three existing buildings over one-million square feet that are totally vacant and a total of 10 buildings more than 500,000 square feet that are also vacant. These 10 buildings comprise 28 percent of the market’s total vacancy. The Northwest submarket posts the highest vacancy at 10.1 percent, where 66 percent of the vacancy is attributed to buildings delivered during 2023.
Overall industrial rental rates continue climbing in the Phoenix market, increasing 2.7 percent quarter-over-quarter and 12.5 percent year-over-year to an average $1.06 NNN. Overall industrial rental rates have increased 53.8 percent since year-end 2021. As the market slows, concessions for tenants are beginning to pick up with landlords increasing tenant improvements. The Southwest submarket led the way in 2023 with rental rate increases, jumping 37.7 percent during the year to $0.93 NNN.
The fourth quarter posted the second highest amount of new product delivered in 2023, adding 7.5 million square feet of new space. Forty new buildings came online during those three months, ranging from 13,000 to 1,200,140 square feet. Of the 7.5 million square feet delivered, 6.1 million are vacant with only 18 percent pre-leased. Approximately 17.0 million of the year’s 27.9 million square feet delivered hit the market without leases, making up 63.1 percent of the market’s direct vacancy. The Southeast submarket led the city with the most new space delivered in fourth quarter, adding 4.7 million square feet. The Greater Phoenix industrial market ended the quarter with the second highest amount of construction in the nation, trailing Dallas. Currently there are 39.7 million square feet underway and the Northwest submarket has 45.9 percent of that activity. The product under construction is 21.6 percent pre-leased.
The new interest rate environment continues pressuring the investment sales market. Sales volume for fourth quarter reached $556 million with an average deal size of 66,113 square feet and average price of $203 per square foot. This was a 6.5 percent decrease in sales volume compared to third quarter and only a slight decrease from fourth quarter 2022. Sales volume for 2023 was down 44.2 percent compared to 2022 with a year-end total of $2.2 billion. The Southwest submarket led the quarter in sales volume at $251.5 million with an average price of $171.64 per square foot. This was primarily due to the Prologis purchase of the recently completed Airpark Logsitics Center in Goodyear. The $184 million sale involved three vacant buildings totaling 1.4 million square feet with an additional 84.1 acres of land.
Greater Phoenix increased its inventory 13.4 percent during the past 24 moths, adding 54 million square feet. It is impossible to rapidly lease all of this space and the vacancy rate is forecast to remain above six percent for the next six to 12 months. Construction has slowed down, which will help the market get the new space leased. The Phoenix manufacturing sector is being recognized on a national and global scale. As the city attracts more and more businesses, the industrial sector will remain the dominant.
