The Phoenix industrial market continues its convincing march toward recovery by reaching several important milestones.
As a more resilient sector during the recession, the industrial market was not plagued with as much bad debt and CMBS loan defaults as others sectors. Industry experts concluded that the industrial sector would recover faster as favorable economic conditions such as durable goods orders and manufacturing output favored the industrial market early.
The sector has posted 10 straight quarters of positive absorption going back to 2010. Vacancy rates have returned to levels not seen since 3Q 2008. This positive direction reflects a rebound in U.S. exports, consumer spending and online purchasing, which has led to a high demand for large distribution space in which there are few options in the Phoenix market.
Confidence in the industrial market and Phoenix in particular, has brought renewed interest in developing new projects. Most new construction is a combination of build-to- suit manufacturing space and several new speculative projects to meet the demand for 100,000+ SF distribution space.
Industrial investment sales transaction velocity remains quite strong despite being down from last quarter’s significant level. However, price per square foot has increased again this period as it has quarter after quarter since 3Q 2009. Industrial land sales transactions were also strong this quarter, posting its best month in a year and second best quarter since 3Q 2008.
But not all is well in the industrial sector. Rental rates, despite slight improvements in several areas, continue to struggle to gain momentum overall. Leasing activity remains sluggish and has slowed by 28% compared with last quarter and is the lowest third quarter total since 3Q 2008.
“Larger leases tend to make up a stronger percentage of leasing activity while currently leases less than 100K SF are proving to be less robust,” says Matt DePinto, Senior Research Analyst with Lee & Associates.
The Valley’s industrial vacancy settled at 13.2%, a 20-basis point drop from last quarter and the lowest overall vacancy rate since 3Q 2008. Absorption settled at a positive 758,573 SF, a far cry from last quarter’s nearly 2.6 MSF of space; however, it completes 10 straight quarters of positive absorption. Year-to-date absorption is at 3.5 MSF.
Eleven projects totaling 3.857 MSF are under construction this quarter. Coldwater Depot, a 56-acre project in Avondale, was the first spec project to announce plans to build a 603,863 SF distribution building since the recession began. There were no deliveries of industrial product this quarter.
Rental rates were flat this quarter at $0.51 PSF (monthly). The Northwest and the Southeast submarkets experienced the most rental growth compared to other submarkets. The Airport Area rates showed the greatest decline. In the largest lease transaction for the quarter, States Logistics Services, Inc. renewed their lease for 276,336 SF at 10397 W. Van Buren St., Tolleson.
There were 96 sales transactions totaling $223.6M, which is down from last quarter’s $350M+ quarter, however, it is the second strongest of any quarter since 4Q 2008. Average PSF was posted at $63.38 and is the highest price per square foot in three years. Actual cap rates have fallen to 6.0% from 6.7% last quarter.
The largest sales transaction of the quarter totaled $90,290,000 for 1,267,110 SF of Class A distribution space at 800 N. 75th Ave. in Phoenix. The buyer was a private REIT, Industrial Income Trust, Inc. of Denver. Price per square foot was calculated at $71.26.
The industrial market outlook remains positive as the Arizona and the U.S. economies continue to improve. Expected population increases here and better than average employment figures have helped bring renewed optimism. Greater speculative development in the Valley has taken hold to fill gaps in inventory.
“This boosts not only optimism in this sector but creates more investment opportunities for the community as well,” DePinto adds.
Lower unemployment figures, higher consumer spending, available inventory at low interest rates, all add up to a sector that is moving confidently in the right direction.