Greater Phoenix industrial market posts strong absorption, driving vacancy lower

Phoenix, October 18, 2017 – Industrial market continues to surge with activity, posting strong net absorption and driving vacancy lower, according to Colliers International’s third quarter 2017 Industrial Market Report.

The metro area continues attracting industrial tenants, resulting in a surge of leasing and a drop in vacancy. Net absorption exceeded 1.8 million square feet during third quarter, which brought the year-to-date total net absorption to more than 6.2 million square feet. During the same three quarters of 2016, the market had posted approximately 4.5 million square feet of net absorption.

More than a dozen tenants larger than 100,000 square feet signed leases during 2017, accounting for nearly three million square feet of space. The trend of large users has been occurring steadily since second quarter of 2016.

Industrial vacancy continues to decline in response to robust tenant demand. During the third quarter the vacancy rate dropped to 9.2 percent, which is 150 basis points below one year ago.  Vacancy is down 90 basis points since the beginning of this year.

The Southwest Valley experienced a decline of 360 basis points year over year and the rate in that area is now just 8.9 percent. The Southwest Valley is forecast to finish 2017 with vacancy at an 11-year low.

Asking rental rates rose during third quarter, reaching $0.57 per square foot per month. This is a 3.5 percent increase from a year ago. Rental rates rose vigorously in 2015 and 2016, but the pace slowed so far in 2017. Average asking rents in Greater Phoenix are forecast to rise between 3.0 percent to 3.5 percent in 2017.

Deliveries of new industrial buildings accelerated during third quarter, following a brief slowdown in the second quarter. More than 1.5 million square feet were delivered during the past three months, bringing the year-to-date total to nearly 4 million square feet. More than 4.7 million square feet is currently under construction in Greater Phoenix.

The new Loop 303 freeway is fueling new construction in the Northwest Valley submarket where nearly 2 million square feet of space came on line this year. New construction is forecast to total more than 7 million square feet in 2017, up from about 5.5 million square feet last year. 

Sales of industrial buildings have gained momentum in 2017, rising 5 percent in third quarter.  Transaction activity is up 10 percent this year compared to 2016. Prices are rising and the median price during third quarter was $90 per square foot, up eight percent over the first half.  The median price of sales in 2016 was $74 per square foot. Cap rates are compressing as prices rise, dipping to 6.8 percent during third quarter. 

Momentum continues to build in the Greater Phoenix industrial market. Businesses are expanding and moving into Greater Phoenix, occupying distribution and manufacturing space.   Robust tenant demand is fueling new development. Approximately 7 million square feet will be completed this year. New construction is forecast to slow down a bit in 2018, but the pipeline could open up for more projects in large users take sizable blocks of inventory.

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