The last two years marked the best years on record in the Phoenix industrial market and there are no immediate signs of slowing. The Valley’s rapidly growing consumer base and trends accelerated by the pandemic have bolstered the need for industrial space. The shift away from brick-and-mortar retail to online has generated increased demand for warehouse and distribution facilities.
Investors are active in the Phoenix market. Sales volume in 2021 reached an all-time high, outpacing the second- best year for transaction volume by a wide margin. Institutional and private out-of-state investors have been behind some sizable transactions over the past few quarters that have bolstered sales. It seems like Ninety Percent of all Millionaires are investing in Phoenix Industrial Real Estate!
Tenants are expanding their footprints in Phoenix at an unprecedented pace. The market has set new records for demand over the past two years, with the pandemic acting as a tailwind for the sector. The increased consumer dependence on online ordering throughout the pandemic and influx of new residents seeking affordability in Phoenix has fueled demand for warehouse and distribution space.
Amazon alone penned 13 leases from January 2020 to December 2021 and is also constructing a 2.3 million SF robotics fulfillment facility in Goodyear. It’s not just Amazon driving demand. Tenants looking for turnkey spaces are preleasing buildings before they deliver. In November, William Sonoma preleased 1.2 million SF that is under construction at The Cubes in Glendale. HelloFresh signed a 440,000-SF lease at Prologis Logistics Center in the Tolleson Submarket in 21Q2. 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 Mesa submarket. 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.
The outlook is mostly positive, but the market will need to absorb a substantial amount of new supply next year that will likely put some upward pressure on vacancies. 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 to a temporary spike in vacancies. In the long term, the demand drivers that have worked in Phoenix’s favor will support industrial fundamentals.
Despite substantial new supply, vacancies have held tight, which has supported almost a decade of positive annual rent growth in the market. Historically, rent growth in Phoenix had lagged the National Index, but after gaining some momentum in 2019, rent growth has consistently outpaced the U.S. average as annual rent growth has accelerated over the past few quarters to about 11.9%. Yet, Phoenix maintains its position as an affordable market for its size. Rents average $9.90/SF, which is near the national average and 30%-40% below asking rents in California markets.
Asking rents vary widely by location in Phoenix. Submarkets in the West Valley have asking rents that are far less expensive than areas in the East Valley and North Phoenix, which is in part due to the large swaths of available and affordable land. Average rents in Tolleson and Goodyear are below $7/SF, while rents are upward of $11/SF in Deer Valley and near $15/SF in Scottsdale. The pace of rent growth is expected to securely hold for the short-term and then level-off 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.
Deliveries are projected to hit an all-time high in 2022. Construction activity has surged in recent quarters, and most of the space is being built without a tenant in place. This rise in speculative construction demonstrates the high level of confidence among developers and lenders that the new product will attract a tenant.
About 36.2 million SF is underway. Once that space is completed, the market’s inventory will expand by 9.4%. That share ranks Phoenix second in the nation for construction as a percent of inventory. The concentration of new supply is in the Southwest Valley, but 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.
Investment volume in the Phoenix market has set records for the past two consecutive years, with an average Cap Rate of 6.3%. The buyer pool has deepened in Phoenix, especially with California- based investors that still perceive some relative affordability and value in the local market.
Investors are bullish on Phoenix’s population and growth and are searching the market for quality assets. In previous quarters, intense buyer competition had put consistent upward pressure on pricing. The average price of $146/SF is 30% above the market’s previous peak but below many West Coast markets.
Businesses are selecting Phoenix to expand because of the extensive labor pool. Numerous employers have announced expansions and relocations since the pandemic. Phoenix has maintained its place among the best-performing markets for job growth. The local economy has been one of the most resilient during the pandemic.
The number of companies moving to metro Phoenix is noteworthy, but the diversity of industries has helped sustain the region’s long-term stability. The economy depended on industries associated with household growth — construction, lending, brokerage, tile and cabinet manufacturers, etc. Because of its past reliance on housing, Phoenix was among the hardest-hit markets during the Great Recession; the market lost more than 300,000 jobs, 25% of which were in the construction industry alone. Phoenix 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. This diversification of industry has helped Phoenix perform best among its peers.
It’s a great time to invest in the Phoenix Industrial market! If you have any questions about commercial real estate 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