July 21, 2023

July 2023 Q2 Industrial Market Report


July 2023 Q2 Industrial Market Report


The Phoenix industrial market is approaching a period of transition as rent growth is downshifting from the unprecedentedly strong pace seen in 2022 to a much more typical trajectory. Still, rent gains have consistently outpaced those seen at the national level, which is expected to continue in 2023, ranking Phoenix as among the strongest markets in the country. Despite the rapid rise in rates over the past few years and rise in heat over the past few weeks, industrial space can still be found at a notable discount compared to Orange County, Los Angeles, and the Inland Empire, making Phoenix an attractive alternative for those considering expansion. Phoenix is on fire!

The East and North Valleys are capturing a lot of new industrial demand related to advanced manufacturing and assembly. The Phoenix area’s rapidly expanding and diversified labor force has prompted major investments related to chip making, aerospace, and renewable energy. Phoenix is also becoming one of the top markets in the country for data center operations due to favorable regulatory treatment, cheap and reliable utilities, and limited risk of natural disasters.





Phoenix’s ongoing growth in advanced manufacturing, particularly for semiconductors, is supporting lease activity. TSMC and Intel have multi-billion-dollar investments underway for new chip making fabs. These projects have prompted the growth of semiconductor suppliers including Chang Chun, Edwards Vacuum, KANTO-PPC, and LCY Electronic Materials, among others. Additionally, manufacturing projects related to renewable energy and sustainability projects are in the works including KORE Power’s 2 million-SF lithium-ion battery plant in Buckeye, JA Solar’s 763,400-lease in Tolleson, Nikola’s new battery plant in Coolidge, and Lucid Motor’s expansion of its electric vehicle production operations in Casa Grande.

The area surrounding the Phoenix-Mesa Gateway Airport is another leasing hot spot. Operators are willing to pay a premium for access to high-growth areas in the Southeast Valley, where they can draw from a strongtalent pool. In the 5-mile radius surrounding the airport, more than 5 million SF of industrial space was leased in the past 18 months, including sizable commitments from Lowe’s, Amazon, Sysco, and Dynalectric.





Historically, rent growth in Phoenix had lagged behind the National Index, but after gaining 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 $12.70/SF, which is near the national level and 30%-40% below asking rents in California markets.

The power dynamic is not as overwhelmingly in the landlord’s favor as it once was due to tenants having more options. Nevertheless, industrial users are still competing over available space, which will keep rents on a steady upward trend.





Geographically, Phoenix’s rapidly growing west-side suburbs have been the primary target of development. The region’s proximity to California and affordability of land 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 with port dependencies and those that serve West Coast markets. Additionally, the expansion of the Loop 303 and 202 freeways strengthens connectivity with the rest of the Valley, catalyzing new industrial construction.

The East Valley in general boasts a high-quality labor force and a more extensively built-out infrastructure network. Other logistical advantages like widespread freeway access and the Union Pacific Railway line make the area a key manufacturing and distribution hub.






Newly built, well-located assets still receive considerable interest from investors. The largest single-asset sale so far this year was Fundrise’s acquisition of a building within The Cubes at Glendale. The real estate crowdfunding platform paid $82.7 million ($145/SF) for the asset, which was delivered just a few months prior and traded unleased. The 570,100-SF distribution property is one of five planned buildings at the industrial park, totaling 4.8 million SF at build-out. Williams Sonoma fully leased a 1.2 million-SF building at the same development in September 2022, which was sold to LaSalle Investment Management for $135 million ($112/SF).

In addition to the change in interest rates, other factors like the source of financing and length of the tenant’s lease term can have a meaningful effect on the investment market. In June 2022, Cohen Asset Management and Intercontinental Real Estate Corporation partnered on the purchase of a brand-new, 863,000-SF property in Buckeye for $182.65 million ($149/SF) that was fully leased to Funko, Inc. on a 10- year lease. They used bank debt and closed the transaction at a 3.5% cap rate. In February 2023, Cohen purchased a newly built 157,600-SF distribution center leased to Frito-Lay on a seven-year triple-net lease in Peoria for $28.65 million ($182/SF). Cohen sourced lending from a life insurance company and closed the transaction at a 5.3% cap rate.






Phoenix remains one of the nation’s better-performing markets for employment growth recording more than 43,800 job additions in the trailing 12-month period ending May 2023. The labor market now has 148,000 more jobs than before the pandemic, the fifth-largest gain in the nation.

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, logistics, technology, life sciences and finance.




While there is a notable slow down in the market compared to this time last year, Phoenix is still showing signs of growth as people continue to migrate to the valley and companies expand to the ever-growing and newly developing industrial sector. If you have any questions regarding the industrial market or the economy or if you need help with any of your assets, please feel free to contact us.


Team Trbo


Source: CoStar

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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.