Construction activity up by 17 percent, pressuring rise in vacancy
Phoenix, February 4, 2019 – Colliers International reports the Greater Phoenix industrial real estate market posted an active 2018, with sales volume up 33 percent over 2017 and construction of new industrial projects up 17 percent. A slight cooling of net absorption at the end of the year put upward pressure on vacancy rates.
During 2018, sales volume in the industrial sector hit $1.61 billion, with only a minor increase in overall number of transactions. This sales volume level was up 30 percent from 2017’s $1.21 billion. This suggests that buildings sold during the year commanded higher prices. The median price for 2018 was $93 per square foot, below second quarter’s $96 high. This is an unchanged annual price from 2017. Cap rates compressed by 16 basis points over the year to 6.88 percent from 2017’s average of 7percent cap rate. Industrial sales slowed in fourth quarter as net absorption did, falling behind the robust levels of second quarter.
Vacancy rose 10 basis points during fourth quarter to 7.5 percent. This nonetheless marks a 10-basis-point decline in vacancy from a year ago. During the past two years, vacancy has fallen by 240 basis points. The Southwest Valley saw an increase in vacancy during fourth quarter, up 140 basis points from year-end 2017. The current 9.8 percent vacancy is reflective of new speculative space being delivered in this submarket. The Northeast Valley experienced the most dramatic change in vacancy, decreasing 300 basis points to 4 percent, making it the lowest vacancy in the Phoenix region.
Net absorption totaled 2.3 million square feet in the fourth quarter, almost matching second quarter, which was a high point of 2.54 million square feet. This fourth quarter outperformed third quarter by 167 basis points. The modest slowdown in net absorption during the second half of the year pushed the vacancy above the cyclical low of 7.2 percent recorded during second quarter. Vacancy in the low-to-mid-7 percent range is a noteworthy improvement from the double-digit vacancy experienced as recently as 2015.
Net absorption is forecast to reach approximately 6.3 million square feet in 2019, lagging the amount of new construction in the market. Several blocks of large speculative space will come online late in the year, creating a possible surge in net absorption early in 2020.
Approximately 5.4 million square feet of industrial space are currently under construction. This is a decline from the first quarter 2018 when 6.8 million square feet were underway. Deliveries of new inventory in Greater Phoenix totaled just over 7.7 million square feet for 2018, and have averaged nearly 5.8 million square feet per year since 2013. Approximately 7.5 million square feet are expected to come online during 2019. As more spec development comes online, vacancy will rise slightly to an anticipated 8 percent by year-end 2019.
Rental rates rose during 2018 to $0.58 per square foot, per month. This marks a 1.8 percent increase from year-end 2017. Rates for big-box distribution space are rising at a faster rate than the overall market. This product type experienced a 6.4 percent increase in rates to $0.46 per square foot per month as of fourth quarter. After several years of impressive absorption, the Southwest Valley is recording strong rental growth. Rental rates are expected to continue rising, since demand for space remains strong. As new developments are completed, their more expensive rates will impact the overall average and likely push asking rents up 3.0 percent to 3.5 percent in 2019.
The Greater Phoenix industrial market is expected to remain strong during 2019, despite some growing pains that come with increased inventory. Net absorption should continue its healthy pace and developers are satisfying the demand for more space with new projects. The infrastructure investment of the Loop 202 extension to connect the Southeast Valley to the West Valley will make transporting goods through and into Phoenix far less time consuming and more appealing for businesses.
Future development and investment activity could be impacted by a decrease in land supply. Technology companies have been acquiring large parcels of industrial land for data center/tech developments. For instance, Microsoft purchased 258 acres in Goodyear for future use. This trend could put a squeeze on the supply of industrial land and raise market prices
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