Phoenix, Arizona is currently one of commercial real estate’s hottest markets, with Phoenix industrial real estate racking up impressive growth during Q3 2022.
Investors looking for opportunities within commercial real estate (CRE) will be encouraged by the high levels of leasing activity within Phoenix industrial real estate.
Not only did industrial real estate outperform office and retail, but a mere 16% of the 18 (MSF) of industrial properties that entered the market in 2022 were still available at the end of September.
Net absorption in the industrial sector set a record for the entire before the year actually ended, reaching 21.7 MSF. Absorption compares the difference between space vacated by departing tenants to the space leased by new tenants. It is applied to certain time frames, such as quarterly or annually.
Here’s more about the Q3 2022 growth of Phoenix industrial real estate.
General Area Overview and Demographics
Known as the Valley of the Sun, Phoenix has enjoyed some of the fastest growth when compared to other big cities, with the number of households increasing by 2.6% year-over-year to 1.9 million.
Built in 1929, this Spanish Colonial Revival building now serves as the Maricopa County Courthouse.
The state’s unemployment rate fell to 2.8% during Q3 2022, lower than metro areas Houston, TX; Denver, CO; and Seattle, WA.
Phoenix offers a business-friendly environment with low taxes and a government with a light touch.
Sun-loving individuals flock to Phoenix, with new arrivals from the north often describing their reason for moving to Arizona as “you can’t shovel sun”.
Average temperatures rarely fall below 46℉ during winter, with summer heating up to an average of 104℉.
The city’s reputation for hot weather was complemented by a commercial real estate (CRE) market that continued its hot streak during the third quarter of 2022.
How Phoenix Industrial Space Performed in Q3 2022
Leasing, sales, and construction numbers for industrial properties reflected the tremendous growth of the Phoenix metro area.
The industrial market absorbed around 4.4 million square feet (MSF), with three of the four industrial product types racking up positive absorption numbers.
Warehouse space led the way, with absorption numbers reaching 2.9 MSF. Over 90% of CRE product types under construction are classified as warehouses. Warehouses were followed by manufacturing space, with 1.4 MSF of absorption.
During Q3 2022, construction activity within Phoenix and Maricopa County reached the highest levels in recorded history, almost reaching the highest levels in the nation. Only Dallas, TX, and Atlanta, GA, experienced higher activity.
What Are Industrial Rents Like In Phoenix?
The direct asking rate for Phoenix industrial properties reached $1.19 per square foot (PSF) during Q3 2022.
This price applied to triple-net, or NNN leases. Tenants with NNN leases pay maintenance, insurance, and tax expenses as part of their total rent bill.
Tenants with leases that are renegotiated annually are seeing their PSF prices rise by up to 4%, depending on their total leased space.
The Chandler submarket’s direct asking rate was the highest at $1.39 PSF. Chandler offers more than 27 MSF of industrial space and easy access to downtown Phoenix.
Six of the semiconductor giant Intel’s fabrication facilities are in Chandler. Ranked directly behind Chandler: the Scottsdale Airport submarket at $1.38 PSF.
Purchase and Leasing Activity
Net absorption within the city’s industrial CRE market rose to 5.9 MSF during the third quarter of 2022. This contributed to the year’s record-breaking absorption of 21.7 MSF.
Industrial vacancies also remained lower than in many other metro areas, coming in at 3.1%.
Demand for all types of space within the industrial arena continued to rise. Numbers for net rentable areas, new supplies, and asking rates all rose during the second and third quarters of 2022.
Biggest Industrial Space Deals in Phoenix During Q3 2022
Before we look at major CRE sales, let’s check out major lease signings for the quarter.
The biggest newsmaker during Q3 was the lease signed by UNIS, a fulfillment, and transportation company.
Initially, UNIS signed a lease for just over 611,000 SF within the Goodyear Logistics Center. Less than two months later, UNIS expanded its commitment to the entire 901,700 SF building.
Other notable leases:
- Corning Incorporated’s leasing of 392,278 SF at Chandler Airport.
- Air conditioning company Lennox International leased just over 340,000 SF of Latitude 303 Logistics, a recently-completed Class A building in West Phoenix.
Interior of a Virgin Galactic Spaceship. Source: © Virgin Galactic 2020.
One headline-grabbing lease: Virgin Galactic’s leasing over 150,000 SF within the Phoenix-Mesa Gateway. The space will be an assembly facility for Delta Class spaceships.
Industrial CRE sales for Phoenix also made headlines.
Sales of industrial properties hit $1.07 billion during 3Q 2022, bringing the median price PSF to $186 for the year.
When measured by square feet, the biggest sale was for 6620 N. Sarival Avenue, a property offering over 1.2 million sq. ft. Purchaser BentallGreenOak paid $147.87 PSF for the Litchfield Park property.
The biggest price paid for an industrial property during Q3 was the $187 million paid by the California State Teachers Retirement System (CalSTRS) for 8560 East Elliot Road in nearby Mesa.
New Development Activity in Phoenix During Q3 2022
Phoenix is currently the fourth-largest market for industrial construction.
Most buildings under construction are within the Northwest and Southwest submarkets.
As with newly-delivered industrial developments, most developments and expansions are “spec” properties, with developers expecting a continuing demand for space.
During Q3 2022, these developments were under construction:
Caprock West at 202 Logistics Park, a 2.55 MSF development in the Southwest Valley.
The Cubes at Glendale, Buildings D-F. These will add 2.26 MSF to the completed Buildings A, D, and E, which added 2.4 MSF to Southwest Valley’s industrial inventory.
What’s Ahead for Phoenix’s Industrial Space Market?
Even with concerns about a possible recession, the Phoenix industrial market pace takes no notice. During 2022, each quarter outperformed the previous one.
According to data released by the Greater Phoenix Economic Council, there are currently 19 prospective tenants seeking larger amounts of industrial space over 200,000 SF.
In closing, here are some takeaways for anyone planning to purchase or invest in Phoenix CRE.
Takeaways for Industrial Space Investors
Professional CRE investors have stated that rising rental prices and temporarily low supplies are the drivers of the industrial sector’s record-breaking performance.
With more investors headed to the Phoenix metro area, both buyers and tenants are faced with premium pricing on industrial properties.
As always: Do your research, be diligent, and always diversify.