After delivering over 10 million square feet of industrial product last quarter, Phoenix continues to be a hotspot for industrial development and currently ranks first in the U.S. for active projects with 37 million currently underway, as highlighted in LGE Design Build’s Q3 Construction Delivery Outlook report released today.
“Custom-built industrial projects, student housing and retail continue to thrive in this market due to steady demand and careful planning,” said Blake Wells, vice president of preconstruction at LGE Design Build. “Construction labor is growing, with notable job additions in the region. While supply chain disruptions present challenges, we are seeing stabilization in material prices, creating a more predictable environment for managing costs. The future looks promising as these factors contribute to a resilient landscape.”
A summary of the report’s other key findings include:
Demand by Product Type
The Phoenix industrial market remains strong, and office construction is moderately increasing despite declining property performance and ongoing financing challenges. Other notables:
- Even with the overwhelming level of new industrial construction, the Phoenix market is generating plenty of demand. Net absorption for the first quarter of 2024 totaled positive 4.5 million square feet, indicating that demand is currently keeping up with the high velocity of new construction. Additionally, industrial rental rates continue to rise, climbing to a new high of $1.15 per square foot.
- In the first five months of 2024, office activity has reached almost 70% of the 2023 total. This rise is driven by growing investor interest in South Mountain and Deer Valley, spurred by major developments like the Taiwan Semiconductor Manufacturing Company and Intel building new plants by 2028, which will create over 20,000 jobs. This job growth is expected to boost demand for household services such as healthcare and insurance, improving property performance. Notably, South Tempe-Ahwatukee has seen significant new office leases from medical providers. Investor interest in medical space remains strong, with vacancy rates dropping, especially in North Scottsdale, where a wealthier population supports high healthcare demand.
Construction Labor
From February 2023 to February 2024, the Phoenix-Mesa-Scottsdale region saw significant growth, with 7,300 construction jobs added. Other notables:
- The Arizona construction sector features three major segments: buildings, heavy and specialty trades. There are currently 46,600 jobs in buildings, which is down 500 from April and up 2,300 from May 2023. Heavy construction was unchanged in May with 25,200 but added 800 over the year. Specialty trades gained 100 over the month for a total of 144,000, and the segment gained 800 year-over-year.
Material Costs
As 2024 progresses, the construction industry is seeing a much-needed stabilization in material prices, despite challenges in some product categories. This marks an improvement from the price volatility of recent years, providing a more predictable environment for managing costs. Other notables:
- While overall prices are stabilizing, materials like drywall have shown consistent price declines over the past six months, a notable change from the high prices since the pandemic. Experts point out that materials such as structural steel, framing lumber, copper electric wire and concrete block each have unique price trends and challenges.
- Looking ahead, continued stability is expected, but the need for resilience and preparedness in project planning is still paramount, as localized cost increases could still occur due to large projects, labor shortages and geopolitical events.
Supply Chain
The supply chain has shown notable improvements in resiliency and stability, but challenges remain across core markets. Other notables:
- Rising ocean freight rates, driven by strong U.S. import demand and shipping issues through the Red Sea and Suez Canal, are a concern. Core commodity prices, especially copper, continue to climb due to high demand and mining disruptions. The recent increase in tariffs on steel and aluminum imports from China, announced by the White House, will further pressure raw material and freight prices, potentially affecting finished goods prices through 2024. The Federal Reserve held interest rates steady following the May CPI report, which showed inflation at 3.3%, slightly down from April but still above their 2% target. The Fed also reduced its rate cut forecast for the year. On a positive note, lead times in core markets have decreased by 23% over the past 14 months, enhancing forecasting and inventory planning accuracy, though some volatility remains.
- Electrical gear and distribution boards are pain points in the supply chain, driven by the high demand for commodity electronic components. Lead times for electrical gear range from 10 to 15 months, while electrical distribution boards face delays of eight to 20 weeks, straining supply availability and production timelines.
- HVAC and drywells, which were once significant pain points in the supply chain, have made substantial strides in meeting demand and continue to demonstrate ongoing improvements.
