Phoenix Industrial Property Revenue Grows 33% in 2018


The large real estate market in Greater Phoenix saw an active 2018 increase of 33 percent compared to 2017 and the construction of new industrial projects by 17 percent. A slight cooling of net borrowing at the end of the year pushed up vacancy rates.

Turnover in the industrial sector reached $ 1.61 billion in 2018, with only a small increase in total transactions. This sales volume increased 30 percent from $ 1.21 billion in 2017, suggesting that higher-priced buildings sold higher during the year. The average price for 2018 was $ 93 per square foot, below the $ 96 high of the second quarter. This is an unchanged annual price from 2017. Cap rates fell by 16 basis points to 6.88 percent over the year, compared to the average for 2017 (seven percent). Industrial sales slowed in the fourth quarter with net absorption, falling short of the robust second-quarter levels.

Vacancy rose by 10 basis points to 7.5 percent in the fourth quarter. However, this means a decline in vacancy of 10 basis points over the previous year. In the last two years, vacancy has decreased by 240 basis points. In Southwest Valley, vacancy increased by 140 basis points in the fourth quarter compared to year-end 2017. The current vacancy rate of 9.8 percent reflects the delivery of new speculative space in this submarket. The northeastern valley experienced the most dramatic change in vacancy rates. It dropped 300 basis points to four percent, making it the lowest vacancy rate in the Phoenix region.

Net absorption for the fourth quarter was 2.3 million square feet, nearly equal to the second quarter, a high of 2.54 million square feet. The fourth quarter exceeded the third quarter by 167 basis points. The slight slowdown in net absorption in the second half of the year meant that vacancy was above the cyclical low of 7.2 percent recorded in the second quarter. The low to mid-range vacancy rate of 7 percent is a notable improvement on the double-digit vacancy seen in 2015.

Net absorption in 2019 is projected to reach approximately 6.3 million square feet, leaving behind the number of newbuilds on the market. Several blocks of large speculative space will be brought online by the end of the year, leading to a possible increase in net absorption in early 2020.

Currently there are approximately 5.4 million square meters of industrial space under construction. This is a decrease from the first quarter of 2018, when 6.8 million square meters were on the way. Deliveries of the new inventory at Greater Phoenix in 2018 totaled just over 7.7 million square feet. Since 2013, an average of nearly 5.8 million square feet per year has been generated. It is anticipated that approximately 7.5 million square feet will go online during 2019, and it is expected to rise slightly to 8 percent by the end of 2019.

Rental rates increased to $ 0.58 per square foot per month in 2018. This represents an increase of 1.8 percent compared to the end of 2017. Prices for big-box distribution space are rising faster than the overall market. This product type saw rates increase 6.4 percent to $ 0.46 per square foot per month in the fourth quarter. After several impressive years, the Southwest Valley is experiencing strong rental growth. Rental prices are expected to continue rising as demand for space remains strong. When new developments are completed, their more expensive interest rates affect the overall average and are expected to increase asking rents by 3.0 to 3.5 percent in 2019.

The Greater Phoenix industrial market is expected to remain strong in 2019, although some growing pain is associated with increased inventory levels. Net absorption should continue to develop positively and developers are meeting demand for more space with new projects. The infrastructure investments of the Loop 202 extension to connect the Southeast Valley with the West Valley will make the transportation of goods to and from Phoenix much less time-consuming and more attractive to businesses. Future development and investment activity could be affected by a decline in land supply. Technology companies have acquired large industrial properties for data center / technology development. For example, Microsoft has acquired 258 hectares in Goodyear for future use. This trend could limit supply to developed countries and increase market prices


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