October 15, 2020

Surviving The Chaos

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. Even with elevated levels of construction, strong demand has maintained a vacancy rate well below the market’s historical average.

Many companies establish 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 near the national average but is roughly 35%-40% below average rents in Los Angeles and Orange County!

Structural elements and Phoenix’s strong demand drivers remain in place. Approximately 35 million consumers can be reached within a single day’s truck ride from metro Phoenix, fueling demand for industrial space among companies in the e-commerce, logistics, and construction industries.

 

 

LEASING

Leasing activity has continued throughout the chaos. Recent commitments include Nellis Auctions (100,800 SF), Enclos (88,500 SF), Oasis (87,000 SF), BDG (69,110 SF), Vestcom Retail Solutions (64,500 SF), Taronis Fuels (64,000 SF), and Goodwill (59,520 SF). Leasing activity has been strongest in the West Valley, including Tolleson, Goodyear, and Glendale. Tenants benefit from proximity to Interstate 10, which provides access to California within a one-day truck haul. Affordability of land, a vast labor pool, and new supply are also contributing factors that are fueling demand for space. Meanwhile, advanced manufacturers and last-mile operators are willing to pay a premium in high growth areas in the East Valley, where they can draw from a strong talent pool in Tempe and Chandler.

RENT

Annual rent growth has decelerated from a high of 6.7% in 19Q2 to about 6.0% but remains well above the market’s historical average. Some submarkets have achieved robust rent growth, while others have lagged. High-demand submarkets that have received new inventory are leading the market in rent growth. Rents average $8.70/SF, which is below the national average and well below asking rents in California.The pace of rent growth is expected to slow in the near term and fall negative, according to the Base Case scenario. The wave of speculative deliveries in Phoenix will limit landlords leverage to raise rents, as has been the case in the past. About 60% of the space under construction in the market is available for lease, which is near the market’s long-term average. Nevertheless, Phoenix’s sustainable growth rivers will continue to support industrial demand upon the return of normal market conditions.

CONSTRUCTION

The market is on track to receive a record level of new supply over the next two years, following a modest pace of construction over the past decade. Tight vacancies and strong demand for space had motivated developers in recent quarters to pick up the pace of speculative building. Developers are on track to deliver an estimated 14.8 million SF of industrial space this year, more than double the new supply that came online last year. New supply will edge even higher next year, setting a record high.
Industrial construction has continued nearly uninterrupted throughout the pandemic since building trades were designated as essential. About 11.7 million SF is underway, which accounts for 3.2% of the market’s¬†existing inventory. That ranks Phoenix among the top 10 industrial markets for construction.

SALES

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. Investors are bullish on Phoenix’s population and growth and are searching the market for quality assets.

ECONOMY

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. These events had an outsized impact on some of the metro’s largest industry sectors: leisure and hospitality and trade, transportation, and utilities.

The latest employment report from the Bureau of Labor Statistics illustrates the weight of the impact and the path to recovery. From March to April, the market lost 200,000 jobs. Since then, employment has started to edge up, making Phoenix one of the nation’s best performing large metros. By August, the market recovered about 40% of March’s job losses as businesses reopened, and school began.

While the number of companies expanding to metro Phoenix is noteworthy, the diversity of industries is necessary for sustaining the region’s long-term stability. More than a decade ago, Phoenix was synonymous with cheap labor and land that attracted call centers and back-office operators. The companies that Phoenix are attracting have evolved. The market has emerged as a bustling technology and financial hub. This diversification of industry is what has helped Phoenix perform best among its peers during the pandemic.

As the economy and the market continue to move back toward normalcy and away from the chaos, it appears we remain strong in moving toward a robust nation that can withstand the toughest of times. If you would like more information regarding the market conditions within the commercial real estate world, please contact me.

Commercial Real Estate FAQs, Phoenix Commercial Real Estate News
About Craig
Craig Trbovich is a commercial real estate broker with Commercial Properties, Inc. in Scottsdale, Arizona, specializing commercial sales and landlord representation in the Phoenix Metro Area. He applies 35 years of experience as a CPA and an investor to help other owners and investors maximize their returns, bringing a strong financial and tax perspective to all aspects of commercial real estate ownership. His strengths include sales and leasing, as well as an in-depth knowledge of the development community and the local market.