Investors paying top dollar for industrial buildings

The Greater Phoenix industrial market followed up a very active second quarter with a bit of a slowdown during the third quarter. Net absorption was still positive, totaling approximately 740,000 square feet, which was the first time in the past eight quarters where the figure had not topped 1 million square feet.

With net absorption posting a modest slowdown, the vacancy rate rose off of the cyclical low that was recorded in the second quarter. Despite a modest 20 basis point increase, the current market vacancy rate is still lower than one year ago. Vacancy in the low- to mid-7 percent range is a significant improvement from double-digit rates as recently as 2015.

Investment conditions somewhat mirrored overall market conditions during the third quarter. Many of the trends were positive, but lagged the fast-paced levels from the second quarter.

Industrial building sales slowed during the third quarter, but the year-to-date total for 2018 is nearly identical to the year-earlier period. While activity cooled a bit, prices continue to push higher. The median price during the third quarter topped $100 per square foot, while cap rates compressed below 7 percent.

Key Takeaways:

  • The Greater Phoenix industrial market cooled a bit in the third quarter, with vacancy ticking higher for the first time in more than a year.
  • Absorption was positive and rents continued to inch higher, but the high volume of tenant activity that characterized the first half of this year did not repeat in the third quarter.
  • Net absorption was approximately 880,000 square feet in the third quarter, down from more than 2.5 million square feet in the second quarter. Year to date, net absorption has totaled nearly 4.7 million square feet.
  • Development of new industrial space remains active, and more projects are scheduled to come online in the fourth quarter. This new construction is putting upward pressure on vacancy.
  • Fewer industrial properties sold in the third quarter, but the buildings that changed hands commanded higher prices. The median price year to date is $100 per square foot, and cap rates have compressed into the mid- to high-6 percent range.

Outlook:

The outlook for the Greater Phoenix industrial market became a bit less bullish during the third quarter, as net absorption slowed and vacancy reversed the longer-term course and ticked higher. With more than 2 million square feet of new spec space scheduled to be completed in the fourth quarter, the local vacancy rate will likely creep higher again in the final three months of the year.

While the vacancy rate is edging higher, tenant demand is forecast to remain very healthy. The Greater Phoenix area continues to attract industrial businesses, and the infrastructure investment of the Loop 202 extension to connect the Southeast Valley to the West Valley will make transporting goods into and through the Greater Phoenix area far less time consuming.

Investment activity has been quite strong, with prices pushing higher and cap rates compressing. The favorable investment climate was highlighted late in the third quarter with a $98.3 million acquisition of and Amazon fulfillment center for more than $97 per square foot.

One factor that could influence future development and investment activity is the recent trend of large parcels of industrial land being acquired by technology companies for data center developments. This could limit the supply of land for future traditional industrial development, and could raise market prices.