According to CoStar’s recent report, strong population and job growth in Phoenix and in the southwestern region as a whole is bolstering a growing consumer base in the region. Overall, approximately 35 million consumers can be served within a single day’s truck haul from the metro, driving demand for industrial space among logistics-oriented companies.
With relatively few barriers to development and positive demographic trends, Phoenix has emerged as one of the fastest-growing industrial markets in the country. Development has primarily been focused on logistics space, which accounted for nearly 90% of new supply in the last year. Demand has outpaced the influx of deliveries this cycle, compressing vacancies well below the historical average.
Phoenix’s average annual net deliveries rank among the top 10 of industrial markets nationally. Perhaps due to the relative ease of building, and susceptibility to boom-bust cycles, vacancies in the Phoenix market tend to be structurally higher than the national average. Although vacancies have traditionally been one of the highest among major U.S. markets, they were still near Phoenix’s all-time low in 18Q4.
A range of tenants has filled the demand gap, led by ecommerce and third-party logistics providers seeking to capitalize on Phoenix’s fast-growing population, strong economic and demographic trends, and proximity to heavily populated areas in Los Angeles and San Diego. Underscoring the shift in this market’s tenant mix, during the housing boom, Home Depot was one of the largest leaseholders, occupying a 552,300 SF distribution building at Capitol Commerce Center in the Tolleson Submarket. Today, that property is occupied by global supply-chain company Menlo Logistics. Furthermore, the largest industrial tenant in the metro is online retail behemoth Amazon, with a footprint near five million SF.
Annual rent growth in the U.S. has been on an incredible run with the national average often trending above 6% in the last several years. Phoenix has trailed the nationwide figures in this time, but relative to the metro’s historical average, annual rent gains have still been robust. The prevalence of speculative construction could be preventing the outsized rent gains seen in many major metros—over 60% of industrial space under construction was listed as available at the end of July.
Nevertheless, Phoenix’s promising population, job and income growth should continue to underpin strong demand for industrial space in the near term. Additionally, the average metro rent recently surpassed the prerecession peak due to consistently healthy gains in the past several years.
Development activity this cycle has been concentrated in the area between West Lower Buckeye Road and I-10 in the West Valley. The area’s desirability stems from its proximity to major transit networks, including I-10, I-17 and the Union Pacific and BNSF railroads. The submarkets that encompass this area—Tolleson, SW N of Buckeye Road, and SW S of Buckeye Road—contain more than 25% of the metro’s existing stock and often receive the bulk of new deliveries. As a case in point, when construction activity returned to the metro in 2013, more than half was located in just these three submarkets.
However, the share of new supply going to this area is decreasing—only 28% of deliveries in 2017, and 21% in 2018 as of October, were located here—indicating that developers have begun to branch out. The area around Phoenix Sky Harbor International Airport has seen an uptick in development recently, as have several submarkets further out in the West Valley.
Glendale and Goodyear stand out as up-and-coming hotspots for development—inventories have expanded rapidly in these submarkets in the past several years. Local developer Merit Partners has been particularly active in the Glendale Submarket. The firm delivered 618,000 SF in the first phase of its PV/303 project in 2017, and completed the second phase totaling 640,000 SF in the first half of 2018. In Goodyear, another prominent Phoenix developer, Lincoln Property Company, delivered one of the biggest spec logistics projects metro history. The 900,000 SF property at Lincoln 40 Logistics completed in October 2018 and was fully available for lease.
Investors of all types continue to show plenty of interest in Phoenix. Sales volume is on pace for a record year in 2018, and pricing continues to rise near the all-time high. Most trades have been for assets valued under $10 million, however, many sizable deals have also taken place.
Boston-based CrossHarbor Capital Partners grabbed headlines with its acquisition of Amazon’s logistics facility at Buckeye Logistics Center in September. CrossHarbor paid approximately $98.3 million ($97.41/SF) for the one million SF property, which is fully occupied by the online retail giant. The deal represented one of the highest price per SF paid for a single-tenant industrial building in metro history. Amazon has quickly expanded its industrial footprint in Phoenix this cycle and occupies nearly 5 million SF throughout the market.
In one of the largest trades in metro history, I/O Data Centers acquired a pair of data centers from Carter Validus Mission Critical REIT for $142.5 million. I/O Data Centers previously sold the buildings, one located at Perimeter Center in Scottsdale and the other at 615 North 48th Street, to Carter Validus in 2014 for $125 million as part of a sale leaseback. The most recent sale closed contemporaneously with Iron Mountain’s acquisition of I/O, including all business, operations and additional real estate in Ohio and New Jersey, for $1.35 billion.
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