Leasing slowed during third quarter as sale prices rose

Phoenix, October 3, 2018 – Colliers International reports the Greater Phoenix industrial market experienced a rise in sale prices as the market cooled in the third quarter. The median price for an industrial building sold in third quarter reached $106 per square foot, up from $97 in second quarter. One of the most noteworthy sales this past quarter was the $98.3 million purchase of an Amazon fulfillment center.

Absorption remained positive during third quarter, but at a much lower level than during the first half of the year. Net absorption totaled approximately 880,000 square feet in third quarter, which was a stark decline from more than 2.5 million square feet absorbed during second quarter.  Year-to-date, net absorption totals nearly 4.7 million square feet. 

Vacancy rose for the first time in more than a year with decreased net absorption and new projects coming online. Industrial vacancy rose 20 basis points during third quarter, but the current rate remains lower than 12 months ago. Vacancy sits at 7.4 percent, which is a noteworthy improvement over double-digit rates experienced as recently as 2015. 

Construction of new industrial properties remains active, with quite a few projects scheduled to come online in the final three months of this year. The new construction is putting pressure on the industrial vacancy rate, but demand may absorb that new inventory quickly in 2019.  Approximately 7.5 million square feet is expected to be added to our industrial inventory during 2018. Approximately 5 million square feet of space is currently under construction. Continued demand from tenants will fuel the construction of more projects in upcoming quarters.

Rental rates rose slightly in third quarter, with asking rates reaching an average of $0.58 per square foot per month. Asking rents have increased 2.8 percent in the past 12 months. Big box distribution buildings have led the market in rate increases, posting a 5.9 percent increase in asking rental rates during the past 12 months.

Fewer industrial properties sold in third quarter, but they retrieved higher prices. The median price for sales during third quarter was $106 per square foot, up from $97 per square foot during second quarter.  The median price year-to-date for industrial properties is $100 per square foot. If we maintain a median price of $100 for the remainder of 2018, this will be the first time the city will have done that since 2007.

Cap rates ticked lower during third quarter, averaging 6.5 percent. Year-to-date cap rates have averaged 6.75 percent, lower than the 2017 average of 7 percent. The pace of industrial building sales for 2018 remains nearly identical to the same time period of 2017.

A handful of large spec projects are slated to be completed in the fourth quarter, which will likely push the vacancy rate to approximately 7.8 percent at year-end. Net absorption is expected to reach approximately 6.5 million square feet in 2018, which is a bit lower than the amount of new construction that will come online this year. The new availability of space could create a surge in net absorption for 2019.

Rental rates will continue elevating as tenants lease newer, more expensive space as it comes online. The market outlook remains strong as the infrastructure for our industrial base expands.  The Loop 202 extension connecting the Southeast Valley to the West Valley will dramatically improve transportation of goods throughout the city. 

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