Strong population and job growth in Phoenix, and the rest of the Southwest, is bolstering a growing consumer base in the region according to CoStar’s recent market summary. Overall, approximately 35 million consumers can be served within a single day’s truck haul from the Valley, driving demand for industrial space among e-commerce and third-party logistics 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 most of the new deliveries in the past year. The relative availability and affordability of land in metro Phoenix, particularly in the Southwest Valley, make it a popular target for developers. Even with elevated levels of supply, demand has kept pace with the rate of development and contributed to vacancies hovering near all-time lows.
Many companies set up industrial operations in Phoenix because of the low-cost of doing business and proximity to major regional markets, particularly in California. The average industrial rent in Phoenix is nearly 5% lower than the national average, and the discount is even more dramatic when juxtaposed to rents in California. Rent growth has trailed the outsized figures produced on a national level recently, but Phoenix is still generating robust gains relative to its historical average.
The Valley is a fairly liquid industrial market and 6% or more of inventory has traded annually since 2015. Sales volume and pricing reached an all-time high in 2018 with nearly 8% of inventory turning over.
Strong demand from e-commerce companies and 3PLs have mitigated supply-driven pressure on fundamentals. Deliveries in 2018, mostly spec projects, reached their highest point in ten years and were snapped up by tenants in need of big blocks of modern industrial space.
A range of tenants has filled the demand gap, led by e-commerce and third-party logistics providers seeking to capitalize on Phoenix’s fast-growing population, strong economic and demographic trends, and proximity to heavily populated markets, particularly those in California.
Strong income growth in the Phoenix area is an encouraging sign for the wealth of logistic providers that depend on disposable incomes. The metro’s median household income often grows at a faster rate than the national average, and three cities (Glendale, Scottsdale, and Phoenix) were among the top 25 U.S. cities with the fastest-growing incomes from 2015-16.
In January 2018, Arizona Governor Doug Ducey announced plans to create the U.S.’s first international air cargo hub at Phoenix-Mesa Gateway Airport, dubbed SkyBridge Arizona. The SkyBridge will have both U.S. and Mexican customs at the airport to facilitate faster and less costly trade between the two nations.
Development activity is concentrated in the area between West Lower Buckeye Road and I-10 in the Southwest 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 area around Phoenix Sky Harbor International Airport has seen an uptick in development recently, as have several submarkets further out in the West Valley.
The Glendale and Goodyear submarkets stand out as up-and-coming hotspots for development—inventories have expanded rapidly in these submarkets in the past several years.
In Goodyear, prominent Phoenix developer Lincoln Property Company delivered one of the biggest spec logistics projects market history. The 900,000-SF property at Lincoln 40 Logistics completed in October 2018 and was fully available for lease.
Investors remain bullish on Phoenix’s industrial market. More than $2.2 billion worth of assets traded last year, a record high, while pricing also climbed to an all-time high.
Over 8% of inventory turned over in 2018, the most in more than a decade. More than 5.5% of inventory has traded annually since 2012, making this one of the more liquid markets in the Southwest.
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 1 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.
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