While the state continues to question where the economy may go as we slowly move toward a hope for recovery and stability, there is optimistic encouragement that, in the coming years, we will pull out of this and move toward a stable and potentially robust economy. Consider it some positive enlightenment in a world full of question.
Robust population and job growth in the Valley of the Sun have bolstered a rapidly growing consumer base in the region and generated industrial demand. Policies adopted to stop the spread of the coronavirus have impacted the local industrial market, both in terms of leasing and investment activity. Industrial is expected to fare better than other commercial property types, with some segments even receiving some upside due to changes in consumer behavior.
With relatively few barriers to development, a flourishing local economy, and favorable demographics, new industrial supply has consistently poured into the market. Much of the new supply is speculative and is primarily tailored to the logistics segment.
Strong demand from e-commerce and third-party logistics tenants have mitigated supply-driven pressure on fundamentals in past quarters. However, recent events in response to the coronavirus are expected to impact industrial demand just as a wave of new supply delivers over the next several quarters.
In the near term, the industrial performance will be bifurcated: Demand will grow for last-mile distributors and essential goods e-commerce operators and will weaken for some manufacturers and nonessential goods retailers.
Tight vacancies have supported 31 straight quarters of positive rent growth in the market. Historically, rent growth in Phoenix had lagged the National Index, but after gaining some momentum last year, rent growth outstripped the U.S. average.
The wave of speculative deliveries in Phoenix will be a headwind to rent gains as they have been in the past. About 60% of the space under construction in the submarket is available for lease, which is near the market’s long-term average. Nevertheless, Phoenix’s sustainable growth drivers will continue to support industrial demand upon the return of normal market conditions.
Construction activity has been elevated over the past few years and will ramp up over the next several quarters due to a hefty construction pipeline. Last year, developers completed about 7.1 million SF, and roughly 12.3 million SF is expected to deliver by year end. Deliveries are expected to reach a peak of more than 15 million SF in 2021—a market record.
Developers have also been active in parts of the Southeast Valley, especially by the Phoenix-Mesa Gateway Airport and south of the Loop 202 near Chandler Airport. About 2 million SF is underway in this area.
Phoenix industrial investment reached a record high in 2019, topping $3.3 billion, and sales velocity carried into the first few months of 2020. However, rising uncertainties due to the pandemic have caused some lenders and investors to take a wait and see approach, which has caused sales activity to slow since March.
Even with the rise in pricing, an average cap rate in the 6.5%–7% range remains attractive to investors.
The Phoenix economy was on solid footing before efforts to contain the spread of the coronavirus wreaked havoc on the local economy. A pause in travel, a statewide stay-at-home order, and social-distancing had brought economic activity to a near standstill from mid-March to mid-May, when the stay-at-home order expired.
Thanks to the large labor pool, businesses are selecting Phoenix to expand their operations. While labor is the primary driver behind the market’s business attraction success, relative affordability helps tip the scale in favor of Phoenix when companies are making their site selection decision. Some major job announcements were announced since the pandemic.
While the number of companies expanding to metro Phoenix is noteworthy, the diversity of industries is necessary for sustaining the region’s long-term viability. The market recovered from the Great Recession about two years after the U.S. The companies that Phoenix is attracting have evolved, and the market has emerged as a bustling technology and financial hub.