The amount of industrial space under construction in Greater Phoenix hit 40.9 million square feet at the end of third quarter 2022, indicating the furious pace that developers have taken to satisfy historic demand in the marketplace. While construction levels have risen, so have rental rates with a remarkable 22.9 percent increase from a year ago.
Net absorption of industrial space during third quarter totaled 4.9 million square feet, bringing the total for the first nine months of 2022 to 21.6 million square feet. The first three quarters of absorption nearly matched the net absorption for the entire year of 2021. This marks the 10th consecutive quarter of net absorption exceeeding one million quare feet. Third quarter included a 15.6 percent increase in deals exceeding 100,000 square feet compared to third quarter 2021. UNIS, a fulfillment and transportation company, signed the largest deal of the quarter, committing to 611,868 square feet at Goodyear Logistics Center. Within 50 days of signing the lese, the company expanded its commitment to the entire 901,700-square-foot building. In July, SiteOne Landscape Supply leased 392,000 squar feet at Lexington South at PV|303. Leasing has been so strong that only 16 percent of the 18 million square feet delivered this year were still available at the end of third quarter.
Vacancy dropped to a new historic low of 2.4 percent, which is a 280 basis point drop year-over-year. This incredibly low vacancy has pressured the market into a strong preleasing stance. Large blocks of space are in high demand, but scarce to find. Only seven buildings in the metro area can accommodate 150,000-square-foot users and just four have space for those wanting to lease 300,000+ square feet. For the third consecutive quarter, the Southwest submarket clusters posted the largest decrease in vacancy, dropping 500 basis points year-over-year, and finishing third quarter at just 1.5 percent. The Northwest submarket cluster follows with a 330 basis point drop year-over-year ending at 3.2 percent vacancy. These two submarkets combined have delivered more than 24 million square feet of new product during the past seven quarters, representing a 6.8 percent increase in total market inventory.
Rental rates jumped 8.7 percent during third quarter and 22.9 percent year-over-year, ending at $0.85 per square foot (NNN). Rental rates have increased on average 8.6 percent annually since 2019. Every submarket cluster has experienced rental rate increases both quarter-over-quarter and year-over-year. The largest ecalations are found in the Northwest area, driven by new construction. Rates increased 25.10 perent year-over-year in that area, settling at $0.77 per square foot.
The market delivered 5.8 million square feet of new inventory in third quarter, bringing the year-to-date total of completed new space to 18.0 million square feet. The current 40.9 million quare feet under constructoin marks a 16.1 percent increase in active development over second quarter. More than 24 percent of this space underway is already pre-leased. Phoenix currently is the number four market for industrial construction, falling behind Dallas/Fort Worth, Atlanta and Greater Los Angeles. Development in the West Valley is reshaping the Loop 303 corridor and also providing infill space along the I-10 industrial corridor. Approximately 73 percent of the new buildings underway are situated within the Northwest and Southwest submarket clusters
Investment sales of industrial properties hit $1.07 billion in total sales volume during third quarter. The median price per square foot ending the at $186 year-to-date. Year-to-date sales volume reached $3.5 billion, marking a 5.09 percent increase compared to the first nine months of 2021. The Southeast submarket posted the highest sales volume, posting 39 percent of the total Greater Phoenix volume. The largest transaction of third quarter was the $187 million sale of Elliot 202, the 1.1 million-square-foot project fully leased to Amazon.
Despite fears of a recession, the Phoenix industrial market shows no signs of slowing. Each quarter has outperformed the last and there is an abundance of tenants in the market that are expected to sign leases in the next three to six months. According to Greater Phoenix Economic Council, there are currently 19 prospective tenants in the market seeking 200,000+ square feet. The elevated levels of new product delivery and constructoin underway has seemingly not pressured vacancy rates. Vacancy remains extremely low, which is driving up rates and hurting small companies that are having trouble adjusting to new rent prices.
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