Cushman & Wakefield has released its new Industrial Construction report, showing demand losing speed as construction completions peak, setting the stage for a return to a more balanced market. The report press release is also attached.
Throughout the current industrial expansion, which began in 2012, the pipeline has often struggled to keep pace with demand throughout the market. In fact, between 2012 and 2022, new supply has only surpassed demand three times on an annual basis. There are several reasons for this, including the restraint shown on the development side compared to the previous expansion.
Phoenix has the second largest pipeline next to Dallas/Fort Worth and is considered a larger/growing market with 375 msf of inventory. Phoenix’s growth has accelerated during the pandemic due to population growth/migration and because it is seen as a cheaper alternative to some of the more expensive west coast markets while maintaining proximity to the consumers. While Phoenix has a large speculative ratio, it is sitting at a 4.4% vacancy rate, 360 bps below its 10-year average. It is a market that has registered strong demand in recent years, providing a cushion on the supply risk side.
From a construction perspective, the West has six submarkets in the top 20, three of which are in the top five. Two of those submarkets, North Goodyear and Phoenix-Mesa Gateway lie in the Phoenix market.
After boasting two years of unprecedented, accelerated demand due to the pandemic, we have now started to enter a cyclical reset to the market—with the space under construction nearly four times the size the pipeline was at year-end 2007. As of Q1 2023, 63% of available logistics space was built before 2000 and over half has clear heights below 28 feet. For many tenant purposes, however, a 32-foot clear height is a necessary minimum which limits options for tenants seeking modern fulfillment space. Due to this change in requirements, the amount of quality space in the market needed to increase. But as demand has pulled back to more historically average levels, the space under development has sustained.
The robust pipeline is now sitting at 663.3 msf as of Q1 2023 with 84% of that space being built as speculative space, bringing the possibility of overbuilding up for the first time in recent memory.
The main questions we are addressing: Is there a risk of oversupplying the market again? Which markets are in more danger of doing this than others? Will we see negative demand?
Before diving into the details, it is important to note that we are not in the same position we were in before the Great Financial Crisis (GFC)—much tighter market conditions are persisting now compared to the last expansion cycle. As of the first quarter of 2023, the overall vacancy rate was 3.6% for the nation.
View the complete report insights here: Industrial Construction Update: Is The Market At Risk For Oversupply?
