Industrial market closes 2017 on an upswing

The Greater Phoenix industrial market finished off a year of robust tenant demand with a strong fourth quarter. The outlook for 2018 calls for continued improvement.

The market has settled into a pattern where net absorption routinely tops 1 million square feet per quarter; and in 2017, the figure for the full year was more than 9 million square feet. Absorption has been fueled by large tenant move-ins, led by UPS, Conair and Huhtamaki North America.

Key Takeaways:

  • Net absorption topped 2.1 million square feet in the fourth quarter, bringing the total for the year to approximately 9.2 million square feet. The vacancy rate has retreated 140 basis points in the past 12 months, ending 2017 at 8 percent.
  • Asking rents inched down a bit in the fourth quarter, ending the year at $0.57 per square foot, per month. Asking rents rose 2.2 percent in 2017, after stronger gains in 2015 and 2016.
  • Approximately 1.2 million square feet of new space came online during the fourth quarter, bringing the total construction for 2017 to more than 5.6 million square feet. Construction activity has remained consistent in recent years, averaging 5.5 million square feet annually since 2013.
  • The investment market was active in 2017. Sales velocity rose by more than 15 percent from 2016 levels, the median price rose to $83 per square foot, and cap rates compressed to about 7 percent.

There was a great deal of momentum in the Greater Phoenix industrial market in 2017, with tenants taking large blocks of space, development continuing at a healthy pace and vacancies tightening.

This momentum is forecast to be sustained in 2018. The year is poised for a strong start, with tenants having already committed to approximately 1 million square feet of move-ins scheduled for the first quarter of 2018. With businesses continuing to expand in the Greater Phoenix area, net absorption is forecast to remain strong.

With vacancy now at a 10-year low, development of new industrial space is forecast to gain momentum in 2018. Construction activity picked up beginning in 2013, and the combined vacancy rates in buildings delivered since 2013 have retreated into the low-20 percent range. As new buildings come online, there could be a few short-term upticks in the vacancy rate, but the demand present in the marketplace should be sufficient to push the overall rate down a bit in 2018.

The strong property performance and the optimistic outlook will continue to support investment activity in the year ahead. More properties are changing hands at higher prices and lower cap rates, which should encourage more properties to be listed for sale.

Once again, the year comes to a close with expectations for rising interest rates in the year ahead, and while rates have inched higher during the past 18 months, this has done little to slow the pace of investment activity in the local industrial market.