January 23, 2024

2023 Year End Industrial Market Report – Manufacturing is Satis-factory in AZ!



Manufacturing is Satis-Factory in AZ! The Valley also boasts strong momentum in terms of advanced manufacturing. And we need it. Even Buzz and Woody are the results of manufacturing! While TSMC and its $40 billion semiconductor plant capture most of the news headlines, other large-scale investments in the battery, electric vehicle, and solar industries as well as their support and suppliers are creating a vibrant ecosystem of high-tech assembly. These tailwinds have helped keep Phoenix’s net absorption stronger than most other markets.

However, conditions are shifting in the Phoenix industrial market as a wave of new construction overwhelms sturdy leasing activity. Developers completed a record 22 million SF in the final two quarters of 2023, outpacing the second-strongest two-quarter period on record by more than 25%. The surge caused vacancy to spike to 8.5% today, erasing most of the occupancy gains made during the pandemic era.

The Loop 303 corridor in Phoenix’s West Valley has been a construction hotspot. Since 2020, industrial developers have completed more than 25 million SF within 2 miles of the recently upgraded highway as the area emerges as a prominent link in national supply chains. Proximity to the Ports of LA and Long Beach has provided steady tailwinds for distributed-related demand both over the long term and especially during the pandemic, when vacant industrial space was nearly nonexistent in Southern California. However, the decline in imports that has persisted at Southern California ports in 2023, coupled with fast-rising industrial availability in the Inland Empire, could pose challenges for leasing in Phoenix during 2024.






While leasing activity has downshifted from the breakneck pace seen in 2021 and 2022, it remains elevated by pre-COVID standards. Over the past 12 months, the Phoenix industrial market recorded 11.3 million SF of net absorption, compared to an average of about 8 million SF per year from 2015 to 2019. Builders, meanwhile, completed a record 30.0 million SF over the past year, contributing to an increase in the metro-wide vacancy rate from a near all-time low of 4.2% in 23Q1 to 8.5% today. These conditions are expected to persist over the near term, with unprecedented supply additions outpacing net absorption, causing property fundamentals to moderate.

Phoenix is still a popular option for third-party logistics (3PL) firms and companies looking to build out their distribution networks. Of the 30 largest leases signed in 2023, eight of them went to 3PLs, headlined by Saddle Creek Logistics’ 570,100-SF lease of Building E of The Cubes at Glendale in October. Apparel companies like FIGS (488,400 SF) and Urban Outfitters (130,000 SF) have signed on for new distribution space as well as auto-related tenants like Tricolor Auto (257,900 SF), Safelite AutoGlass (146,000 SF), and PGW Auto Glass (138,100 SF).






The pace of rent growth continues to decelerate in Phoenix as higher vacancies and increased competition from new supply drive a period of normalization. While rates increased an impressive 11.2% over the past 12 months, they remain below the 16.4% gain the market saw in late 2022. Additionally, on a quarter-over-quarter basis, rents rose 1.7% in 23Q4, a slowdown from the 4%+ gains seen in early 2022.

Despite posting some of the strongest rent growth figures in the nation, Phoenix industrial properties remain affordable compared to many other markets, helping attract users looking to build out their distribution networks in the Southwest. Rents average $13.40/SF, which is in line with the national average and well below levels seen in most California markets.

Expectations are for a further moderation in rent growth throughout the year as the market digests the record supply pipeline. CoStar’s Base Case forecast, which includes a mild recession this year, calls for annual rent growth to end 2024 in the sub-3% range. High-growth areas with a sizable pipeline of speculative deliveries could face additional softness as tenants find more available options.






The surge in construction starts that took place in 2022 began to hit the market last year, with industrial developers delivering a record 22 million SF of net deliveries in the final two quarters of 2023. With many of the projects delivering vacant, the upswing in speculative completions negatively impacted the metro-wide vacancy rate as the market navigates a period of transition. The supply waves are expected to continue over the near term, with 44.1 million SF remaining under construction. That amount represents 9.8% of existing inventory, more than tripling the 2.4% share seen at the national level. With about two-thirds of development occurring without a tenant in place, the delivery of speculative buildings are expected to put further upward pressure on the vacancy rate in the coming quarters.

Moving forward, the Valley boasts several long-term tailwinds that support underlying industrial demand, including strong momentum in terms of advanced manufacturing, a growing role in national supply chains, and a rapidly expanding consumer base. While these factors sustain tenant interest in Phoenix industrial properties, the record delivery schedule is outpacing steady demand, causing property fundamentals to normalize. Construction starts fell by more than 35% in 2023 as elevated interest rates for new construction loans make it more difficult to break ground. As a result, Phoenix could see a moderation in new supply by 2025, helping return balance to the market.






The rapid rise in interest rates over the past 20 months has begun to reshape buyer strategies. In 2021 and 2022, when rates were lower, the market saw more newly delivered and fully leased core asset trading. As borrowing costs have increased, however, properties with a more predictable income stream and limited ability to create value have become less active. Investor demand is now strongest for value-add deals, particularly those in which in-place leases are 20% below the market rate and the new owner can increase rents and boost returns as leases roll.

Investors are also turning to newly delivered vacant properties that have lease-up opportunities. For example, Prologis made a splash with its $184 million ($128/SF) acquisition of the first phase of Airpark Logistics Center in October. The three-building development by Creation Equity is located adjacent to the Phoenix-Goodyear Airport in the West Valley and set a total sale price record in the market among multi-building sales. The asset delivered in July and was fully vacant at the time of sale, providing the San Francisco-based REIT with the ability to add value by taking on lease-up risk. Airpark Logistics Park’s second phase includes two buildings totaling 1.3 million SF, though construction has not begun yet. Other assets that traded shortly after delivery without a tenant in place this year include Westcore’s $92.7 million ($102/SF) acquisition of Hatcher Industrial Park in August and Meritex’s $20.4 million ($183/SF) acquisition of 17 North Corporate Center in June.






The competitive advantage and growth drivers that have historically stimulated growth in the Valley remain strong. Relative affordability and job prospects are attracting people living in dense and expensive cities to Phoenix. The increase in remote work has given more people mobility and has enticed residents in California or East Coast markets to relocate, bringing their high-wage jobs with them. Population growth, a diversifying economy, relative affordability, and business-friendly regulation have strengthened the Phoenix value proposition. These characteristics attracted an average of 175 net new people to the Phoenix metro each day in 2022 and made Maricopa County the fastest-growing county in the country, on an absolute basis.

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.





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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.