MARKET DRIVERS
Construction activity continues to drive the Phoenix Industrial market, with deliveries totaling 11.6M SF in 2Q24 alone. Through the first half of 2024 industrial completions total 21.6M SF with upwards of 31M SF currently under construction.
Record-level construction activity throughout the region is exerting pressure on vacancy rates, resulting in a year-over-year (YOY) uptick in both vacancy and availability rates. Vacancy increased by 620 basis points (bps) YOY to 11.0%, while availability rates grew by 220 bps to 14.6%. Quarter-over-quarter (QOQ) vacancy rates only grew by 90 bps while availability grew by 10 bps.
Despite the uptick in vacancy rates due to the large number of properties being delivered without a tenant, net absorption remains firmly positive. Direct net absorption totaled positive 6.9M SF in 2Q24, with year-to-date direct net absorption totaling positive 11.4M SF. Through the first half of 2024, direct net absorption is outpacing 2023’s total positive direct net absorption of 14.9M SF.
Due to today’s higher interest rate environment, investment sales activity continues to trail from the heights of the 43.9M SF trading hands in 2021. Sales volume fell 12.2% YOY to 5.4M SF but ticked up from the previous quarter’s 3M SF.
ECONOMIC REVIEW
According to the Arizona Office of Economic Opportunity, Phoenix metro’s unemployment rate in May decreased 40 bps YOY to 3.0%. This is compared to the state’s seasonally adjusted unemployment rate of 3.4% and national rate of 4.0%.
Total nonfarm employment throughout the Phoenix Metro continues to grow, resulting in a 2.3% increase in YOY employment. The Phoenix Metro accounted for roughly 75% of the state’s YOY nonfarm employment growth.
NEAR-TERM OUTLOOK
Following the sharp increase in industrial demand in over the last few years, direct rental rates have remained steady QOQ at $1.15/SF NNN and are only up 16.2% YOY. Since 1Q21, industrial direct rental rates throughout Phoenix have grown by approximately 77% and are now beginning to normalize.
The 31M SF currently under construction is likely to continue to drive vacancy rates higher over the next year. Over 60% of the product currently under construction is available for lease, further attributing to the increase in vacancy rates. Once development activity begins to stabilize, vacancy rates are anticipated to fall followed by an eventual uptick in rental rates.
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