2018: The Year That Was
- The Greater Phoenix industrial market cooled a bit in the fourth quarter; vacancy ticked 10 basis points higher to 7.5 percent over the quarter but was 10 basis points lower over the year.
- While absorption rebounded to a little over 2.3 million square feet in the fourth quarter, nearly matching second quarter’s high of 2.54 million, rents remained unchanged at $0.58 per square foot.
- Development of new industrial space remains quite active with a 17 percent over the year increase in projects under construction. As a result, new construction is putting upward pressure on vacancy, which has witnessed minor 10 to 20 basis point increases over the last three quarters.
- In 2018, industrial property sales volume surged 33 percent to $1.61 billion, with only a minor increase in overall transactions, which suggests that the buildings that changed hands commanded higher prices. The median price settled at $93 per square foot, below second quarter’s $96 high, and unchanged when compared to 2017. Cap rates continued to compress decreasing 16 basis points over the year to 6.88 percent.
The Greater Phoenix industrial market ended 2018 with a bit of a slowdown during the fourth quarter. Net absorption was still positive, totaling approximately 2.3 million square feet, it was less than second quarter’s high of 2.5 million and 38 percent lower than fourth quarter 2017’s high of 3.8 million.
With net absorption posting a modest slowdown, the vacancy rate rose off the cyclical low of 7.2 percent that was recorded in the second quarter. Despite a modest 30 basis point increase, the current market vacancy rate is still 10 basis points 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 fourth quarter. Many of the trends were positive, but lagged the fast-paced levels from the second quarter. Industrial building sales slowed during the fourth quarter, but 2018 sales volume trended 33 percent higher than in 2017 with median price maintaining its $93 per square foot amount with cap rates below 7 percent.
The outlook for the Greater Phoenix industrial market became a bit less bullish at the end of 2018, as net absorption slowed, and vacancy reversed its long-term trend and ticked higher, albeit mildly. 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 generally pushing higher and cap rates compressing, despite near-term increases. 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/ tech developments, such as Microsoft’s purchase of 258 acres in Goodyear. This could limit the supply of land for future traditional industrial development, and could raise market prices.