Last year marked one of the best years on record in the Phoenix industrial market. Demand and new supply reached new highs, and that activity has carried into the first few months of 2021. With Phoenix’s strong demand drivers and competitive advantage, let’s hope this year could also be one of the best years on record. Approximately 35 million folks 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. Phoenix has also become one of the most active data center markets in the country due to Arizona’s tax incentive for data center development, a robust and growing power grid, and limited occurrence of natural disasters.
Industrial tenants are actively searching for space in the Phoenix market, following a historic year for both net absorption and supply additions. Move-ins have been more than enough to offset recent closures, and vacancies are near a historic low, despite a record level of new supply in 2020. Over the past 10 years, steady demand and a conservative level of supply have put consistent downward pressure on vacancies. Leasing activity is robust and remains strongest in West Valley submarkets, including Tolleson, Goodyear, and Glendale. Tenants in these submarkets benefit from proximity to Interstate 10, which provides California access within a one-day truck haul.
The outlook for the Phoenix industrial market is positive. Demand will intensify for last-mile and e-commerce users, data center operators, and manufacturers. Submarkets with a hefty supply pipeline and a large amount of speculative construction, such as Goodyear and Glendale, will be more vulnerable over the next several months to a temporary spike in vacancies. In the long term, the demand drivers that have worked in Phoenix’s favor will support industrial fundamentals.
Annual rent growth has accelerated over the past few quarters to about 6.7%. 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, and Glendale submarkets have posted rent growth above 7.5%. Some of the most expensive submarkets in the East Valley have posted rent growth in the high 5% to low 6% range, which is still far above the National Index.
The pace of rent growth is expected to hold firm in the near term and decelerate by mid-2022, according to the Base Case scenario. 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 market received a record level of new supply last year, and progress is being made on a hefty supply pipeline. About 19.2 million SF is under construction, which will expand the market’s inventory by 5.1% once completed. Approximately 65% of the space under construction is available for lease, which is a high share compared to the past several years, when speculative space accounted for 30% to 40% of new inventory.
The concentration of new supply is in the Southwest Valley. The region’s proximity to California and relative affordability have fueled demand for manufacturing and distribution space. Major transit networks, including I-10, I-17, and the Union Pacific and BNSF railroads, support firms that serve West Coast markets. Recent infrastructural improvements, including the expansions of Loop 303 and Loop 202, have helped traffic flow and contributed to rapid population growth in several West Valley communities.
Despite the slowdown in investment during the onset of the pandemic, sales volume approached an all-time high in 2020, totaling $3.0 billion. Only 2019’s sales total beat last year’s volume. Investor appetite has carried into the first few months of 2021. Buyers are searching the Phoenix market for last-mile facilities, and many deals are being driven by 1031 exchange deadlines.
More than 7% of inventory has traded annually since 2012, making this one of the more liquid markets in the Southwest. About 11% of stock turned over last year, the highest mark in more than a decade. The most prominent investors are coming from outside of the state. More than 20% of transactions in 2019 involved California-based buyers.
Phoenix has maintained its place among the best performing markets for job growth. Efforts to contain the spread of the coronavirus disrupted years of hearty employment gains, but the Valley lost fewer jobs (on a percentage basis) than any other large metropolitan area.
The competitive advantage and growth drivers that were stimulating growth in the Valley of the Sun may be stronger than ever. People living in dense and expensive cities have always looked to Phoenix for job opportunities and affordable living. But a rise in remote work will entice more people to move to Phoenix as an affordable option to California or East Coast markets. The market is better positioned than it was a decade ago. Population growth, a diversifying economy, relative affordability, and business-friendly regulation have strengthened the Phoenix value proposition. These characteristics are attracting more than 200 people to Phoenix each day.
Investors are bullish on Phoenix’s population and growth and are searching the market for quality assets. With the strong demand comes limited supply for investors. However, investors working on the construction of new industrial buildings are quickly taking on new leases to fill the spaces to capacity creating new, quality assets for the market. Let’s hope that’s not all folks!
If you have any questions about the industrial or any other commercial market, please do not hesitate to contact me.