The 2020 year has finally closed out (to the relief of most of us) and many are looking forward to what 2021 may bring us. With a vaccine in place and new presidency in office, it is certain that changes are upon us. Many are wondering what the effects of job loss and closures will bring to the new year. Some even predict foreclosures in the forefront but, according to CoStar, Phoenix’s Industrial market looks positive going into the new year. A lot of people think the vaccine is overrated, but I think it’s worth a shot…or two! Fire away!
Strong population and job growth in the Valley of the Sun have supported a rapidly growing consumer base over the past several years, which has generated demand for industrial space. Industrial has fared better than other commercial property types since the onset of the pandemic. Phoenix’s strong demand drivers and competitive advantage remain in place. Approximately 35 million consumers can be reached within a single day’s truck ride from metro Phoenix, fueling industrial space demand among companies in the e-commerce, logistics, and construction industries. With 35 million people needing vaccines – talk about a demand driver!
Leasing
Not all industrial segments are benefiting from the changes in consumer behavior and economic activity since the onset of the pandemic. A slowdown in consumer spending on discretionary goods, supply chain disruptions, and the falloff in travel and gatherings have weakened some manufacturing-, airport-, and events-related businesses.
Leasing remains the strongest in West Valley submarkets, including Tolleson, Goodyear, and Glendale. Tenants in these submarkets 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. More vaccines will equal less vacancy!
Rent
Annual rent growth has decelerated from a high of 6.7% in 19Q2 to about 5.4% but remains well above the market’s historical average. Some submarkets have achieved robust rent growth, while others have lagged. High-demand and affordable submarkets are leading the market in rent growth. The Tolleson, Goodyear, Glendale, and North Airport submarkets have posted rent growth above 6.5% over the past 12 months.
The pace of rent growth is expected to slow in the near term, but remain positive, according to the Base Case scenario. The outlook for rent growth is far better than what the market experienced during the Great Financial Crisis. The wave of speculative deliveries in Phoenix may limit landlords’ leverage to raise rents in some areas of the Southwest Valley in the near term.
The largest occupancies this year represent a variety of industries. Lucid Motors, an autonomous vehicle manufacturer, moved into 479,210 SF in Tempe and an 822,000-SF build-to-suit in Pinal County. Microsoft’s third data center delivered in El Mirage in April (254,000 SF), and Compass Data Center took 227,000 SF in Glendale. Toyota and Geodis, a logistics and transportation company, each moved into 136,800 SF at 10 West Logistics Center in Phoenix.
Construction
Developers have been active in the Southeast Valley, especially by the Phoenix-Mesa Gateway Airport and south of the Loop 202 near Chandler Airport. About 1.2 million SF is underway in this area. In 20Q2, construction completed on The Landing 202, a 486,000SF distribution facility. Dexcom fully leased the space and will take occupancy in 21Q2. The same developer, Marwest Enterprises, is underway on the Landing Phase III, which consists of seven speculative buildings totaling 525,000 SF. Nearby, SkyPlus Developments broke ground on two buildings in the first phase of Skybridge. The customs facility will ultimately bring 4 million SF in and around the airport.
Glendale leads the market with new supply underway; construction accounts for about 22% of the submarkets existing stock. Inventories have expanded rapidly in Glendale and nearby submarkets in the past several years, coinciding with the completion of Loop 303. Merit Partners has been active in Glendale and recently completed a build-to-suit for Mark Anthony Brewing (916,000 SF) and is nearing completion on a manufacturing (700,000 SF) and distribution (530,000 SF) facility for Red Bull. The largest project underway is the Elwood Logistics Center in Goodyear. Tratt Properties broke ground on the 1.3-million-SF speculative space in 20Q1. The project (Elwood Logistics Center), which was completed in 20Q4 , is located south of Interstate 10 and Loop 303 and is within a designated Opportunity Zone and a foreign trade zone. About 14 miles east, in Tolleson, a similar-sized speculative property delivered in 18Q4 and sat vacant until Amazon signed a lease for the full building in 20Q2.
Sales
Despite the slowdown in investment during the onset of the pandemic, sales volume approached a record high in 2020, totaling $3.0 billion. Only 2019’s sales total beat last year’s volume. Investors are searching the Phoenix market for last-mile facilities, and many deals are being driven by 1031 exchange deadlines.
In September, Kohlberg Kravis Roberts & Co., a New York-based private equity firm, purchased the West 80 industrial building in Tolleson from Westcore Properties for $43.2 million. The pioneering technology leader, ABB, occupies the entire building, which was built in 19Q3. The seller said that it is a big believer in the fundamentals of the Phoenix industrial market, as demonstrated by its acquisition of two buildings and commencement of construction on two ground-up developments since the COVID-19 pandemic started. Westcore purchased an Amazon-leased building in Chandler in June and Brooklyn Bedding’s manufacturing building in Phoenix in April.
Economy
The sharp job losses were temporary, and Phoenix bounced back quicker than most other metro areas. Phoenix lost about 200,000 jobs in April and March. By November, the market recovered about 80% of those job losses as businesses reopened and school began. Phoenix is still on the road to recovery. The recovery depends on an improving health situation, and the baseline forecast anticipates that employment will return to pre-pandemic levels by mid-2022.
The quantity of companies expanding to metro Phoenix is noteworthy, but the diversity of industries has helped sustain the region’s long-term stability. The companies that Phoenix is 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.
Thanks to the extensive labor pool, businesses are selecting Phoenix to expand their operations. Some employers have announced expansions since the pandemic. Amazon announced it would open 11 last mile and fulfillment sites in various cities within metro Phoenix and a 95,000-SF office in Tempe, creating thousands of new jobs. Zoom, a California-based video conferencing company, revealed plans to open a research and development center in Phoenix. TSMC (Taiwan Semiconductor Manufacturing Company) made headlines for its commitment to bring more than 1,600 jobs to the state with a $12 billion semiconductor factory. Other companies that have made substantial expansion announcements over the past few years include Allstate, Deloitte, Door Dash, Open Door, Silicon Valley Bank, Choice Hotels, Mayo Clinic, Wells Fargo, Farmers Insurance, and USAA. Microsoft, Google, and Apple have also invested in data centers throughout the metro. 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 make their site selection decision.
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. Phoenix’s expanding workforce and diversity of industries has been a “shot in the arm” for the Industrial Market in 2020.
The industrial market remained strong throughout the toughest year (2020) our country has seen in a very long time. With more consumers buying online, warehousing has become a hot commodity in today’s commercial industry. Manufacturing and storage are high on the list of needs and remain a leader in real estate. If you have any questions regarding where you should invest your dollars or what’s going on in today’s market, please do not hesitate to contact me.
Source: CoStar
Click Here For The Full CoStar Report