The Greater Phoenix industrial market delivered 10.0 million square feet of new space during second quarter, marking the completion of a portion of the record construction started in 2023, according to a report released by Colliers. Strong net absorption totaling 5.3 million square feet assisted in minimizing vacancy rate escalation, resulting in a current vacancy of 9.0 percent.
Record levels of construction were posted during the first half of 2023 and the Phoenix industrial market has delivered 19.7 million new square feet year-to-date 2024. These figures for 2024 are equivalent to 70.6 percent of total new supply delivered in 2023. Of the 19.7 million square feet delivered this year, 12.1 million are currently vacant, and make up 31.6 percent of industrial direct vacancy. During the past six quarters, the industrial market has delivered 47.6 million square feet of new space, equating to 11.2 percent of total inventory. The Northwest submarkets delivered the most product during second quarter, adding 5.6 million square feet. Currently, there are 28.0 million square feet under construction with more than half of that located in the Northwest submarkets. Approximately 26.7 percent of the 28 million square feet underway is pre-leased.
Second quarter marked the 17th consecutive quarter surpassing one million square feet of industrial net absorption. The 5.3 million square feet of net absorption posted in second quarter bring the year-to-date total to 9.7 million. Second quarter net absorption was the highest level in the past five quarters. Approximately 4.0 million of the 10.0 million square feet completed during second quarter was pre-leased by tenants including Amazon, Nestle and JX Nippon. Only one transaction larger than 500,000 square feet was signed during second quarter. Logistics Plus committed to 595,381 square feet at Reem Ranch 303. Transactions between 20,000 and 100,000 square feet had the highest velocity for the quarter, making up more than 65 percent of transactions.
The addition of 39.2 million square feet of new inventory in the past 12 months has flipped the market with more options for tenants. Vacancy has increased 600 basis points year-over-year and 90 basis points quarter-over-quarter to 9.0 percent. The 2:1 ratio of new deliveries to net absorption is putting upward pressure on vacancy levels. There are currently 14 existing buildings that can accommodate a tenant of 500,000+ square feet, totaling 9.9 million square feet. The Southeast submarket cluster posts the highest vacancy at 13.0 percent, which is attributed to a collection of new projects delivering 7.3 million square feet in 2024.
Despite elevating vacancy, rental rates continue to rise. Yet, the pace of increases has slowed to the lowest year-over-year level in the past 10 quarters. Rates rose during second quarter 9.9 percent to $1.12 NNN. Overall industrial rental rates increased 68.6 percent over the past three years and have increased 42.3 percent during the past two years. The Southwest submarket cluster led the market in rate increases for the sixth consecutive quarter, rising year-over-year 16.6 percent to $0.98 NNN. High vacancy in the Southeast market has infused more competition and resulted in slowing rental rate increases to a year-over-year 6.1 percent.
Sales volume of industrial properties improved during second quarter, following first quarter’s low sales performance. Second quarter sales volume was up 78.9 percent from the first quarter to $843 million. This was the highest level of sales in six quarters, outperforming second quarter 2023 by 44.5 percent. Year-to-date sales volume reached $1.3 billion, marking a 22.5 percent increase over the first half of 2023. The average price per square foot paid last quarter was $190.46, an increase of 3.8 percent year-over-year. The West Valley posted nearly two-thirds of total sales volume in second quarter with $313 million in the Southwest and $245 million in the Northwest Valley. The largest transaction last quarter was a two-building sale near Goodyear Airport totaling 725,303 square feet. The properties were 100 percent leased to NPSG Global and Meyer Burger and sold for $108 million. CIM Group sold the properties to Stonelake Capital Partners. The second largest sale was a five-building , multi-tenant portfolio totaling 539,560 square feet. Blackstone purchased the properties from KKR.
Following a historic high level of industrial construction, demand for new construction has slowed and we now have the smallest amount of construction in the past 10 quarters. If all inventory being constructed is delivered at its current leased level, direct vacancy will only increase to 13 percent. This is still a relatively healthy level for such a dynamically growing market. Greater Phoenix has built projects that are appealing to the many businesses targeting our city for expansion and relocation. These projects set us apart from competing markets that struggle with development restrictions, and a lack of quality inventory, to satisfy the needs of industrial users.
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