Phoenix’s development-friendly environment, booming local economy, and favorable demographics help new industrial supply pour into the market. The Phoenix market can reach roughly 35 million customers in one day by truck, which has appealed to e-commerce, logistics, and construction industries. The Phoenix market rents are also 35 to 40 percent below Los Angeles and Orange County, and more than 20 percent of 2019 transactions in Phoenix involved California-based buyers. In the last year, consumers have heavily shifted towards online shopping and ordering, which has impacted last-mile delivery operations. Amazon has noticed and signed the most notable leases in Phoenix in 2020, ranging from small to large distribution centers. Further, sparked by Arizona’s tax incentive for data center development, Phoenix’s data center activity has reached new heights, making it one of the country’s most active markets.
Vacancy & Rent Fundamentals
Despite the global health crisis constraining most commercial product types, industrial was among the few to continue activity throughout 2020, primarily among warehouse and distribution centers. Throughout 2020, a record level of new supply outpaced demand, but vacancies remain at historical lows. In Q2 2020, Phoenix reached the third-highest absorption in its history, and the momentum carried into Q3 and Q4 2020. In late 2019, Phoenix vacancies were at historic lows due to consistent and steady demand with new deliveries. The metro’s absorption has outpaced new supply annually since 2010, with an exception in 2013. Thanks to its diverse and expanding tenant base, Phoenix has seen demand from e-commerce, third-party logistics, data center operators, and more.
For the last 34 quarters, vacancies have remained tight, resulting in positive rent growth of six percent. While rent growth in the Phoenix market historically runs behind the CoStar National Index, 2019’s momentum has pushed the metro to outpace the U.S. average in 2020. Rents are $8.89 per square foot as of Q4 2020, below the national benchmark, keeping Phoenix an affordable market. Experts believe the outlook for rent growth is better than the Great Financial Crisis, but landlords will be limited in raising rents as the market awaits a wave of deliveries.
More than seven percent of inventory has traded annually since 2012, making the market one of the most liquid in the Southwest. In 2019, Phoenix achieved record-high sales of $3.3 billion, which carried into the first few months of 2020. While the pandemic inevitably slowed activity, transaction volume picked up due to rising demand and the 1031 Exchange deadlines, reaching another record high of $3 billion by the end of 2020. Local and national buyers fed into activity, but out-of-state investors accounted for the largest deals. Amazon acquired a 200,000 square foot last-mile facility for $87.7 million in a 12-year lease.
Historically, Phoenix has been conservative with new deliveries, helping keep vacancies low. However, because the market continued construction through the pandemic, it saw a record level of new supply in 2020, a total of 14.8 million square feet. Nearly 16.2 million square feet had already been delivered in 2020, and an additional 9.6 million is currently in the works, increasing inventory by 2.6 percent when delivered. A 1.3 million square foot facility located in an Opportunity Zone broke ground in Q1 2020 and delivered in Q4 2020. These impressive fundamentals have landed Phoenix in the top five industrial markets for construction as a percent of existing stock.
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