According to Colliers International in Arizona, construction of new projects in the Greater Phoenix industrial market has hit a historic record with approximately 19.1 million square feet currently being built, and net absorption of industrial space has pushed vacancy rates to 5.9%, the lowest ever achieved in the market. Phoenix has now broken into the nation’s list of top-tier marketplaces, which is resulting in stronger attention and demand from investors and new-to-market businesses.
Arizona’s economy is booming and experiencing record revenue growth, as well as personal income growth. From 2019-2020 Arizona led the nation (tied with Montana) in the category of largest personal income growth by posting a 7.1% increase.
The Greater Phoenix industrial market brought 3.6 million square feet of new product to the market during second quarter. These new projects were completed with vacancy of just 45.4%. Sixteen buildings were completed during second quarter, five of them fully leased when delivered. This strong leasing activity illustrates the rapid change of supply chain and ecommerce activity in our city. New projects totaling 5.0 million square feet of new construction were started during the past three months.
Approximately 73% of the 19.1 million square feet currently underway in the Valley are located in the Northwest and Southwest submarket clusters. The Cube, a 1.2 million-square-foot speculative warehouse was started last quarter along the Loop 303 corridor at Northern Avenue and Reems Road. The Southeast Valley experienced a groundbreaking of its first speculative warehouse project exceeding more than one millino square feet. The Marwest Capital project called Elliot 202 is located on the northwest corner of Loop 202 and Elliott Road.
The industrial market posted 5.8 million square feet of net absorption during second quarter 2021. This marks the ninth consecutive quarter of net absorption exceeding 1 million square feet. Year-to-date net absorption totals 11 million square feet, which is equivalent to 82.4% of all net absorption posted in 2020. HelloFresh committed to 438,687 square feet at Prologis Lotistics Center IV in Tolleson. The building is currently under construction and expected to be completed this quarter. Ashley Furniture signed a lease to occupy an entire builing at Majestic Tolleson Center II, a 224,874-square-foot speculative building completed in 2019.
Direct vacancy decreased 70 basis points quarter-over-quarter and 190 basis points year-over year to hit the mid-year point at 5.9%. The Southeast submarket cluster, which delivered eight buildings totaling 623,342 square feet completely vacant, still managed to have the largest decrease of vacancy year-over-year. The Northwest submarket cluster delivered the most new inventory for the second conseutive quarter, yet this new inventory only resulted in slight vacancy rise of 70 basis points to finish the quarter at 6.3%.
Average rental rates for industrial space rose again during second quarter as a result of strong tenant demand. Rates elevated 1.56% over-the-quarter and 6.56% year-over-year. The current average asking rental rate is $0.65 per square foot. Average rental rates have increased an average of 4.3% annually since 2018. The Airport Area experienced the largest increase in rental rates, followed by the Southeast submarket cluster. Manufacturing space rates surpassed Warehouse facilities with the largest increase year-over-year, increasing 9.76% and 9.2%, respectively.
Combining the rise of rental rates and decline in vacancy has resulted in stronger sales volume. During second quarter industrial sales volume rose to $547 million. The market experienced a 2.96% increase in median price per square foot over-the-quarter to $134.
The appeal of Greater Phoenix will result in continued rental rate increases as the pipeline of projects under construction begins to deliver. Active tenant interest will likely keep vacancy rates low, below the 10-year average of 8–9%.