January 31, 2023

2022 Year-End Market Report – Travelin’ Back In Time!


It’s no secret that the Valley’s industrial market has boomed significantly over the last few years with major brands like Amazon, Facebook and Red Bull joining other big names putting Phoenix on the map for growth and expansion.  All this growth has been a contributing factor to the dramatic increase in pricing that’s occurred in the recent past as well. As the difficulty in finding many products and day-to-day expenses swelled, especially gas prices, many wished they could “Go Back In Time”.



The past three years were the best on record for Phoenix industrial properties, which helps to explain why the market has had one of the most aggressive construction pipelines in the United States. The impact of this new supply became evident in the second half of 2022 when metro-wide vacancy recorded its first increase since mid-2020, despite record absorption levels. The current vacancy rate of 4.9% remains tight compared to pre-COVID but is a noticeable uptick from its recent all-time low of 4.3%. Underlying demand is driven by The Valley’s key role in national supply chains, rapidly expanding consumer base, and growing advanced manufacturing industry.

Industrial investors continue to target the Phoenix market. Sales volume in the past 12 months reached an all-time high, outpacing the second-best year for transaction volume by a wide margin. Notable institutional and private out-of-state investors including the California State Teachers’ Retirement System (CalSTRS) and Cohen Asset Management have been behind some sizable transactions over the past few quarters that have bolstered sales. Let’s look at the details.




Tenants continue to expand their footprints in Phoenix at an unprecedented pace. The market has set new records for absorption over the past two years as e-commerce growth and an expanding population drive the need for warehouse and distribution space. Additionally, Phoenix’s ongoing growth in advanced manufacturing is supporting activity. TSMC’s $40 billion investment to build a pair of semiconductor fabs in North Phoenix is generating excitement in the metro and expectations are that knock-on effects from the plant’s suppliers and ancillary operations will stimulate new industrial demand. While Amazon has slowed its distribution network expansion in 2022 and even begun to put existing distribution centers up for sublease across the U.S., so far, it doesn’t look like the e-commerce giant’s cost-cutting measures will devastate the Phoenix industrial market. Hey Amazon! “Your future hasn’t been written yet. No one’s has. Your future is whatever you make it. So, make it a good one.”

Meanwhile, on the other side of The Valley, the area surrounding the Phoenix-Mesa Gateway Airport is another leasing hotspot. Operators are willing to pay a premium in high-growth areas in the Southeast Valley, where they can draw from a strong talent pool. The largest such signing was Lowe’s, who recently preleased 1.2 million SF at The Cubes at Mesa Gateway, which is slated for delivery in 2023. In the 5-mile radius surrounding the airport, 3.5 million SF of space was leased in the last 12 months, including sizable commitments from Amazon and Virgin Galactic, a private spaceflight company.




Historically, rent growth in Phoenix had lagged behind the National Index, but after gaining some momentum in 2019, rent growth has consistently outpaced the U.S. average. Yet, Phoenix maintains its position as a relatively affordable market for its size. Rents average $11.80/SF, which is near the national average and 30%-40% below asking rents in California markets.

Asking rents can 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. For example, Deer Valley and Scottsdale have a greater concentration of smaller, last-mile facilities that operators use to access the area’s robust population base. This type of space tends to be more expensive than the large-scale fulfillment and distribution properties found in less dense submarkets. Average rents in Tolleson and Goodyear are around $9/SF, while rents are upward of $15/SF in Deer Valley and over $19/SF in Scottsdale.





Deliveries hit an all-time high in 2022 and are projected to hit a record again in 2023. This will challenge recent strong leasing activity and rent growth. Construction activity has surged in recent quarters, and much 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 “if you build it, they will come.”

About 48.4 million SF is underway with approximately 30% already leased, a stark contrast to the nearly 75% of construction that was preleased about 10 years ago. Once that space is completed, the market’s inventory will expand by 13%. That share ranks Phoenix among the top markets in the nation for construction as a percent of inventory.

A large 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. “Roads? Where we’re going, we don’t need roads.”






Outsized industrial investment activity continues in Phoenix with sales volume setting a record in 2020 and then again in 2021. That momentum carried into the first half of 2022, with sales volume in 22Q1 and 22Q2 marking the strongest opening six months of the year on record. Nearly $2.6 billion of industrial property traded hands during that time, roughly on pace with 2019’s full year total, which was itself a record year for sales volume. The rise in interest rates began to have an effect in the back half of 2022 as transaction activity eased. Nevertheless, 2022 was an exceptional year for Phoenix and the buyer pool has deepened, especially with California-based investors that seek some relative affordability and value in the local market.

Out-of-state and institutional investors were behind the largest deals over the past 12 months. In August, the California State Teachers’ Retirement System (CalSTRS) paid $187 million ($157/SF) for Elliot 202, a two building, 1.2 million-SF property a few miles north of the Phoenix-Mesa Gateway Airport. Amazon signed on to lease the entire facility in one of the largest space commitments of 2022. Additionally, another California based investment group, Cohen Asset Management, purchased an 863,000-SF distribution center in Buckeye for more than $128 million ($149/SF). The speculative development was completed in early 2022 and fully leased by Funko Inc., the pop culture collectible manufacturer, at the time of sale.






Phoenix remains one of the nation’s best-performing markets for job growth. The local economy has been highly resilient during the pandemic, thanks to a diversified employment base. Metro Phoenix lost about a quarter million jobs in March and April 2020. By July 2021, Phoenix fully recovered those job losses, a stark contrast to its protracted recovery from the global financial crisis of the Great Recession.

The number of companies moving to metro Phoenix is noteworthy, but the diversity of industries has helped sustain the region’s long-term stability. Phoenix was synonymous with cheap labor and land that attracted call centers and back-office operators more than a decade ago. 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 metros during the Great Recession; the market lost more than 240,000 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 hub for advanced manufacturing, aerospace, life sciences, logistics, technology, and finance. This diversification of industry has helped Phoenix perform best among its peers.




Moving forward into the new year, many question what the market will do. With interest rates rising, will construction continue? While some slowing has occurred, it appears that the industrial market may remain strong. “If our calculations are correct, when this baby hits eighty-eight miles per hour…you’re gonna see some serious sh**t!” If you have any questions about the economy or commercial real estate investments, please do not hesitate to contact us.

Team Trbo

Source: CoStar

View the full CoStar report here.

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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.