Phoenix’s strong demand drivers and competitive advantage remained in place through the fall of the pandemic. 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. 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. Although some commercial markets took a hit through the closing of the country, most have begun to return with a rise as we move forward after the big “Knock Out”. The industrial market stood steady on its feet and kept punching away while others struggled to stand tall.
It’s not just Amazon that is driving demand. The largest space commitments in recent months represent a variety of industries, including e-commerce, advanced manufacturing, food & beverage users, pharmaceuticals, and data centers. Tenants looking for turnkey spaces are preleasing buildings before they deliver. HelloFresh signed a 440,000-SF lease at Prologis Logistics Center in the Tolleson Submarket in 21Q2. The building is slated to deliver late this year, and the site will be HelloFresh’s largest global production and distribution facility. MLILY, a mattress manufacturer, signed a 1.2 million-SF lease at G303 in Glendale, a development that was completed just one month earlier. Lastly, Facebook announced it would begin construction on an $800 million data center in the east valley. The first phase will consist of two buildings totaling 960,000 SF near Elliot and Ellsworth roads. The first building is slated for completion in 2023. Facebook will join other data center operators in East Mesa, including Google and Apple.
Annual rent growth has accelerated over the past year to about 10.6%. 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 8% over the past year. 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 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.
Developers have also been active in the Southeast Valley, especially by the Phoenix-Mesa Gateway Airport and south of the Loop 202 near Chandler Airport. About 3 million SF is underway in this area. Near Gateway airport, construction is underway on three speculative buildings totaling 330,500 SF at Power 202 Business Park. Nearby, SkyPlus Developments is underway on the first phase of Skybridge, which totals 450,000 SF. The customs facility will ultimately bring 4 million SF in and around the airport. A few miles north, Marwest Enterprises broke ground on two buildings totaling 1 million SF at the Elliot 202 industrial park in 21Q2.
Sales volume entered by the end of the quarter reached $600 million — setting a record for second quarter volume. Buyers are targeting last-mile facilities, and many deals are being driven by 1031 exchange deadlines.
In previous quarters, intense buyer competition had put consistent upward pressure on pricing. The average price of $128/SF is 30% above the market’s previous peak but below the National Index. Even with the rise in pricing, an average cap rate in the 6.5%-7% range remains attractive to investors.
Phoenix has maintained its place among the best performing markets for job growth. The local economy has been one of the most resilient around the country during the pandemic and has added jobs at a much faster clip than many markets of its size. The market lost about 243,000 jobs in March and April of last year. By June 2021, the market recovered about 78% of those job losses. Phoenix is still on the road to recovery, and the baseline forecast anticipates that employment will return to pre-pandemic levels by the end of 2021.
The competitive advantage and growth drivers that have historically stimulated growth in the Valley of the Sun may be stronger than ever. Affordability and job prospects are attracting people living in dense and expensive cities to Phoenix. The adoption of remote work has given more people mobility and has enticed more people in California or East Coast markets to move to Phoenix. Population growth, a diversifying economy, relative affordability, and business-friendly regulation have strengthened the Phoenix value proposition. These characteristics are attracting more than 220 people to Phoenix each day.
The industrial market remains steady throughout the pandemic and beyond. If you have any questions about the commercial real estate market or are looking for assistance regarding commercial property, please do not hesitate to contact us.
Thank you from Team Trbo! Craig Trbovich and Niki Saunders