MARKET DRIVERS
THE CONSTRUCTION PIPELINE posted a staggering, record high of 38.5M SF in Q1, more than 20M SF from two years ago pre-pandemic. The Phoenix metro now ranks second in the nation for industrial construction activity, breaking past Inland Empire, the nearby industrial market giant in California. The largest project currently underway is CapRock West 202 Logistics, the first large-scale industrial complex to be built along the recently completed Loop 202, a welcomed new infrastructure improvement that contributed to increased population growth in the market.
AVERAGE ASKING RENTAL RATES SOARED to a record high of $0.73/SF on a triple-net basis, the first time it has reached past the $0.70/SF mark. Rent growth in Phoenix has recently outpaced the national average but despite the steady increase, the market maintains its position as an affordable market when compared to the 30-40% markup of nearby major regions in California.
INVESTORS REMAIN BULLISH on the Phoenix industrial market. Local buyers are competing against many out-of-state and institutional investors, who are behind some of the largest deals in Phoenix. In recent trends, real estate firms who’s focus have been in investments for other types of real estate are shifting into industrial. As such, the strong buyer competition has put an upward pressure on pricing as sales prices averaged an all-time high of $164/SF in the first quarter.
ECONOMIC OVERVIEW
THE PHOENIX LOCAL ECONOMY remains among the best-performing markets for job growth. The Milken Institute’s 2022 Best-Performing Cities list, which ranks cities on a variety of metrics including job creation and wage growth, recently ranked the Phoenix metro 4th in the nation. This is up three spots from 2021 and up from 12th in the nation in 2020.
ACCORDING TO the Arizona Office of Economic Opportunity, Phoenix metro’s unemployment rate in February decreased 360 basis points YOY to a low 3.1%. This is compared to the state’s rate of 3.6% and national rate of 3.8%.
NEAR-TERM OUTLOOK
THE PHOENIX INDUSTRIAL market’s record level performance in 2021 carried into the first quarter of 2022 and will continue to fire on all cylinders over the next year. The recent demand for industrial space is unapparelled and the market will remain one of the top in the nation for last-mile and e-commerce users, data center operators, and manufacturers.
THE MARKET’S INVENTORY will expand by slightly over 10% by year’s end, when a majority of the projects are set to deliver. As much of the development is speculative and being delivered without a tenant in place, the market may be vulnerable to a temporary spike in vacancies but the strong demand drivers in Phoenix will work to support the industrial fundamentals in the long term.
DATA SOURCE: COSTAR, AZ OFFICE OF ECONOMIC OPPORTUNITY, AZ CENTRAL
Click here to subscribe to Kidder Mathews market research.