An impressive 49.2 million square feet of new industrial space is under construction in Metro Phoenix, according to the mid-year industrial report released by Colliers in Arizona. This marks a 40.2 percent increase in construction compared to the end of June 2022. During that same 12 months, average industrial rental rates increased 24.5 percent, causing “sticker shock” for renewing tenants.
Towards the end of second quarter, construction began on approximately 6.4 million square feet of new industrial space in Metro Phoenix, increasing the total amount underway to reach 49.3 million square feet. Approximately 19.04 percent of that space being built has already been pre-leased. One reason the figure reached such a high level is the extended construction timelines caused by supply chain and labor issues. During second quarter, only 3.8 million square feet of new space was completed, making it the lowest period for additional new inventory in six quarters. Approximately 56.8 percent of the quarter’s new space, or 2.2 million square feet, was leased prior to being finished. Second quarter completions brought the total delivered year-to-date to 8.3 million square feet. Approximately 54 percent of that new inventory is located in the Southwest submarket. The Southeast submarket had the largest expansion of current product underway, marking a 105.6 percent increase year-over-year for that area of the metropolis.
Despite increased supply in the market, robust demand for industrial space has maintained pressure on rental rates. The average asking rental rate increased 24.5 percent year-over-year to $1.01 (NNN monthly) and 2.2 percent quarter-over-quarter. During the past two years, the Metro Phoenix market has averaged a year-over-year rental rate growth of 20.9 percent. Rental rates have increased 52.8 percent since second quarter 2021. Tenants negotiating renewals have been shocked by the rapid increase. The Northeast submarket leads the city with the highest rental rates at $1.40, and an 11.9 percent increase year-over-year. Five submarkts witnessed increases both year-over-year and quarter-over-quarter.
The second quarter marked the 13th consecutive quarter of industrial net absorption surpassing a million square feet. The first half of the year finished with 8.3 million square feet of net absorption, 3.9 million of that posted in second quarter. During the second quarter, 13 new direct leases were signed that each exceeded 100,000 square feet. Seven of these were signed for buildings that are currently under construction. The largest lease was signed by medical uniforms company FIGS, which is taking 488,400 square feeet at Lexington North in Northwest Phoenix. The second largest lease was signed by CJ Logistics at Commerce @303, involving 331,684 square feet
Strong absorption has helped the robust market maintain a remarkably compressed vacancy level of just 3.0 percent. This is a level status of vacancy compared to first quarter, but a 40 basis point increase compared to mid-year 2022. Larger blocks of space are in high demand, with only 15 existing buildings available to accommodate tenants seeking 150,000 square feet and only one option for businesses seeking in excess of 500,000 square feet. The Northeast submarket leads the city for lowest vacancy at 2.0 percent, decreasing 40 basis points since mid-year 2022.
The recent increases in interest rates have shaken the investment sales market, which is working to establish its footing. The Phoenix industrial market outperformed first quarter by 19.2 percent, ending with $583 million in sales during second quarter. This remains slow as compared with the market high of $1.43 billion that was captured a year ago during second quarter 2022. The average price per square foot paid during second quarter reached $183.45, which is a slight increase quarter-over-quarter. The national Blackstone portfolio sold to Prologis included nine Metro Phoenix properties totaling 1.6 million square feet. The Northwest Valley led the market in total sales volume during second quarter with $231 million in sales, nearly 40 percent of the volume postion marketwide. This was driven by two sales, Falcon Park 303 for $81.6 million and The Cube Glendale building E that traded for $82.6 million. The first was fully occupied and the second was 100 percent vacant at the time of the sale.The largest porfolio sale of the quarter involved three buildings owned by developer George Oliver and sold to KKR. The assets traded for $165 million and included 1,282,863 square feet.
Despite the new interest rate environment, the Phoenix industrial market is demonstrating strong fundamentals. As a growing epicenter for the semiconductor industry and a hub of business growth in the Southwest, Metro Phoenix continues to attract companies from out of state and fuel growth of those already here. The remainder of 2023 is expected to bring more strong demand for the large volume of industrial space being developed.
