Phoenix industrial market sets all-time records in 2021

Phoenix industrial market sets all-time records in 2021

Article Originally Posted By AZBigMedia On January 24, 2022

The Metro Phoenix industrial market set a series of records in 2021, making it the most active year in the area’s history, according to a report from Colliers. Net absorption in 2021 was 80 percent higher than 2020, construction levels hit a historic peak in fourth quarter, and vacancy rates dropped to their lowest levels ever in the final months of the year. In addition, investment sales reached their historic high level during fourth quarter.

The industrial market’s dynamic activity can be attributed to a number of factors, one of the largest being the Valley’s historic low unemployment. Metro Phoenix unemployment fell to 2.8 percent at the end of November. As of November 2021, Phoenix had approximately 18,300 more people in the labor force than in February 2020 (pre pandemic).

During 2021, the Metro Phoenix industrial market posted 24 million square feet of net absorption, nearly doubling the amount recorded in 2020 (13.4 Million). Fourth quarter marked the seventh consecutive quarter of net absorption greater than two million square feet. Large leases in the final three months of 2021 included Home Depot’s commitment to 1.3 million square feet at Elwood Logistic Center. In addition, Williams Sonoma signed a lease for 1.2 million square feet at The Cubes at Glendale. Warehouse and distribution spaces led the market in absorption, but advanced manufacturing companies are also relocating or expanding in the city. The Swiss solar company, Meyer Burger, selected Arizona over Tennessee and Georgia as the location for their new manufacturing facility.

Strong absorption drove the Metro Phoenix vacancy rate to a record low, dropping 40 basis points during 4.8 percent. The market added 15.2 million square feet of new industrial space during 2021, but managed to decrease vacancy 260 basis points during the year. Every submarket posted decreased vacancy both quarter-over-quarter and year-over-year. The largest decreases were experienced in the Southwest and Southeast submarkets. Large blocks of space are in such high demand that currently only 16 existing buildings offer options for tenants seeking 150,000 square feet. A mere nine options offer available blocks of more than 300,000 square feet.

Rental rates increased 9.8 percent during 2021 and 3.1 percent during fourth quarter, which are the largest quarterly and annual increases in Phoenix industrial market history. The average asking rental rate has reached $0.69 per square foot. Industrial rental rates have increased 17.1 percent since fourth quarter 2019. The Southwest submarket posted the largest elevation in rates both year-over-year and quarter-over-quarter, increasing by 13.9 and 5.7 percent respectively ending at $0.54 per square foot. Warehouse product posted the largest increases year-over-year increasing 11.2 percent to $0.65 per square foot. Manufacturing product type posted the largest increase quarter-over-quarter, increasing 2.3 percent and ending the year at $0.77 per square foot.

Each quarter of 2021 set a new record for construction levels in the industrial market and fourth quarter followed the trend. Currently 30.2 million square feet of new space are underway with more than 30 percent of the space already committed to tenants. Approximately 75 percent of projects under construction are located within the Northwest and Southwest submarkets. The four largest completsions during fourth quarter were located in the West Valley and were all 100 percent leased at the time of delivery.

Investment sales volume during fourth quarter topped $2.7 billion, bringing 2021 sales total to $4.9 billion. Fourth quarter was the top producing single quarter for investment sales in Phoenix history. The median price per square foot of sales in the fourth quarter increased 30.6 percent year-over-year to $159 per square foot. The median price paid during 2021 was $140 per square foot, marking an increase of 23.2 percent compared to 2020. Cap rates continued compressing with a decline of 22 basis points to 5.80 percent. Fourth quarter posted the largest portfolio sale, a 74-property offering that was sold by Reliance Management to Equus Capital for $1.15 billion.

The 2022 outlook for Metro Phoenix industrial remains strong. While some may speculate whether the market is becoming overbuilt, it is important to notice that during 2021 we added 15.2 million new square feet, but absorbed more than 24 million. Vacancy has dramatically decreased and the tenant pipeline remains extremely robust. More investors and employers are looking at Phoenix because of the healthy, sustainable growth, as well as robust and strong labor force.