Q1: Steady As It Goes
- Greater Phoenix industrial market had an overall strong first quarter led by continued job growth with industrial using employment increasing nearly 7 percent over-the-year, the highest in nearly a decade.
- During the 12-month period ending in February, preliminary estimates show that employers added nearly 64,300 net new jobs, an increase of 3.1 percent, which places Greater Phoenix #2 in overall job growth for the country.
- Net absorption, which was 2.3 million square feet in the fourth quarter 2018, decreased to approximately 550,000 square feet.
- While absorption lagged, under construction projects spiked to 7.3 million square feet and rents increased 1.8 percent over-the-quarter, 3.4 percent over-the-year, to $0.57 per square foot.
- Development of new industrial space remains quite active particularly in the Southeast and Southwest portions of the Valley. As a result, new construction is putting upward pressure on vacancy, which has witnessed minor 10 to 40 basis point increases over-the-quarter, specifically in warehouse and manufacturing subtypes.
- In the first quarter, industrial property sales volume surged 44 percent over-the-quarter to $356 million, with only a minor increase in overall transactions. The median price settled at $104 per square foot, which is the second highest over the last several years but below third quarter 2017’s $106 high. Cap rates continued to compress decreasing 40 basis points (bps) over the year to 6.72 percent.
Despite a modest slowdown in net absorption, the vacancy rate in the first quarter decreased to its previous cyclical low of 7.2 percent, which was first hit in second quarter 2018. Vacancy has been trending in the low- to mid-7 percent range since the end of 2017, and is a significant improvement from double-digit rates as recently as 2015.
Development activity ramped up to 7.3 million square feet to meet persistent demand in the market. Approximately 1.4 million square feet of new space was delivered in the first quarter and over 7 million square feet has come online during the past year. As previously noted, despite consistently high deliveries vacancy rates continue to contract.
Investment conditions improved in both over-the-quarter and year numbers. While many of the trends were still positive, they did lag the fast-paced levels from early 2018. Industrial building sales volume decreased over-the-year; however, median price continued its upward trajectory hitting $104 per square foot amount with cap rates below 7 percent.
The outlook for the Greater Phoenix industrial market became more bullish after 2018’s less than stellar end. Although first quarter saw reduced absorption, vacancy rate continued its march downward to 7.2 percent with tenant demand continuing 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.
On a macro level, in January, as a result of substantial market volatility at the end of 2018, not only did Chairman Powell reverse course on Fed balance sheet reductions, he, as well as other Fed governors, decided to stop ongoing interest rate increases leaving rates at their current 2.5 percent. In a sign of a more dovish Federal Reserve moving forward, Stephen Moore, President Trump’s recent pick to serve on the Fed, called for an immediate 50 bps decrease in interest rates to counter both tariffs and growing financial instability, particularly from slowing growth in China and Europe.
The net result, markets remained robust for most of the first quarter and the drag on real estate prices many were expecting, as a result of rising rates, has not materialized. With a more dovish Fed, and more talk of QE 4 (Quantitative Easing), expect elevated demand for commercial real estate assets to continue.