Litigation + Valuation Perspectives

Demystifying Valuation, Economic Damages + Forensic Accounting

Vacancy rate for greater Phoenix industrial market decreases in 2015

Fourth quarter 2015 stats bode well for industrial properties in Greater Phoenix

Absorption

  • 1.4 million square feet of space was absorbed in the fourth quarter of 2015 (Q4) which impressively was the 23rd consecutive quarter of positive absorption in the Greater Phoenix industrial market.
  •  Net positive absorption for industrial space in 2015 was almost 8.5 million sq. ft. Most of the absorption gain was concentrated in build-to-suits, owner-built, and second generation space. (*)

Vacancy

  • Vacancy declined to 10.3% in Q4, a notable decrease over 11.1% in the third quarter of 2015 and 11.4% in the fourth quarter of 2014. This reduction is particularly encouraging when you consider that the vacancy rate hovered between 11% and 12% during the prior six quarters. In fact, Q4 marked the first time since 2007 that the industrial vacancy rate in Greater Phoenix fell below 11%.

Asking rental rates

  • The average monthly asking rental rate inched up a penny in Q4 to $0.52 per square foot on a monthly triple net basis.

Cap rates

  • Cap rates averaged 7.5% in Q4 and were 7.6% for all of 2015.

The charts below present Cushman & Wakefield’s statistical data in the fourth quarter of 2015 for all classes of industrial space in Metro Phoenix related to total buildings, inventory, vacancy rates, net absorption, square feet under construction, and average rental rates. Note that net positive absorption in the Southwest Phoenix submarket accounted for 29% of the 4,027,249 square feet sold in Metro Phoenix in Q4 but its vacancy rate of 14.3% was the highest of any of the 17 submarkets in the Cushman & Wakefield study.

The experts are forecasting another good year for the Phoenix industrial market in 2016

  • According to Collier’s International, “Vacancy in Greater Phoenix industrial properties will continue to trend lower in 2016, with net absorption outpacing deliveries of new space by approximately 1 million square feet. The vacancy rate should end 2016 in the low-to-mid 10 percent range.”
  • In regard to asking rents, Colliers International opines “Tenant demand for industrial space is strong and vacancy is improving, which should continue to push rents higher in 2016. Average asking rents are forecast to increase by more than 4 percent in 2016.”
  • CBRE believes investor interest in Metro Phoenix warehouse and distributing facilities will remain strong in 2016 and recommends purchases of industrial properties along transportation corridors to enable online retailers to provide same day delivery to customers.

Employment and population growth should create demand for industrial properties in 2016

  • In October of 2015, Forbes Magazine named Arizona the best state for future job growth, projecting 3.1% growth through 2019.
  • In a September 2015 report on the technology industry in the United States, CBRE ranks Phoenix and San Francisco tied for number one in technology job growth nationwide.
  • The University of Arizona estimates that Metro Phoenix experienced a net migration increase of 12.1% in 2015 and forecasts net migration increases of 17.5% and 22.1% respectively in 2016 and 2017.

Do you recall your Economics 101 professor hypothesizing that job and population growth will almost always stimulate demand for real estate? As this theory pertains to the industrial market in Greater Phoenix, your instructor was correct as long as absorption outpaces new construction.

Gary Ringel, CGREA

Resources

The primary sources for information in this article are the Greater Phoenix/Industrial 4Q 2015 Research & Forecast Report published by Colliers International; the Phoenix Industrial, Q4 2015 Marketview published by CBRE; and the Industrial Snapshot Q4 2015 MarketBeat published by Cushman & Wakefield.

(*) Second generation space is industrial space occupied by a prior tenant that has been improved and rented to a subsequent tenant.