MARKET DRIVERS
Phoenix remains a well-positioned market for industrial tenants with over 475M SF in total inventory. The market has evolved into a booming hub for manufacturing and emerging technologies. Construction activity has slowed in 1Q25, with 16.3M SF currently underway, a significant decrease from 40M SF reported in 1Q24. This trend is expected to persist throughout the year, which may help address the demand-supply imbalance.
Total vacancy rate increased by 300 basis points (bps) year-over-year (YOY) to 12.8%, a total of 60.6M SF vacant. Compared to 4Q24, vacancy rates have remained flat. Availability rates experienced an increase of 160 bps to 15.5% YOY.
In 1Q25, vacancy rates in buildings sub 100K SF remained steady at 6.5% QOQ, which was a 90 bps increase YOY. Buildings above 100K SF also recorded no vacancy rate change QOQ, both measuring at 16.6%. This was a 300 bps increase YOY.
Leasing activity has dropped 30% from 6.8M SF in 4Q24 to 4.8M SF in 1Q25. However, direct net absorption in 1Q25 totaled 3.6M SF, driven by large 3PL groups beginning to occupy their spaces this quarter. Direct asking rents remain steady quarter-over-quarter (QOQ) at $1.13 /SF NNN.
Sale activity remains lower than expected due to the lack of owner-user properties hitting the market, with a majority of transactions involving sub 100K SF buildings.
ECONOMIC REVIEW
According to the Arizona Office of Economic Opportunity, Phoenix metro’s unemployment rate in February increased by 60 bps YOY to 3.6%. The increase is due to an increase of jobseekers entering the labor force alongside a slowdown in hiring momentum.
The Trump administration is focused on implementing reciprocal tariffs in response to trade policies with the US in 2Q25. The overall effect on the market is still uncertain, however, potential cost increases could impact project timelines and consumer spending in the long run.
NEAR-TERM OUTLOOK
Due to market uncertainty, a decrease in leasing activity may persist as warehouse tenants delay signing new leases until there is more clarity on the impact of enacted tariffs. In the long term, demand could rise in the logistics and manufacturing sectors.
Vacancy rates will continue to rise into 2025 until new supply is absorbed and new construction continues to decline.
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