Phoenix is one of the top metros in US for delivered industrial space, report shows

Phoenix is one of the top metros in US for delivered industrial space, report shows

Article Originally Posted by PhoenixBusinessJournal on October 31, 2022

Between 2010 and 2021, the Phoenix metro brought online more than 76 million new square feet of industrial, according to a report from 42 Floors.

That places the Valley at No. 6 on the list of the top metros in the nation for delivered industrial space, behind Dallas, Southern California, Chicago, Houston and Atlanta. 42 Floors relied on data from real estate marketplace CommercialEdge and only looked at industrial properties that were at least 25,000 square feet.

With millions of square feet under construction, those numbers are poised to grow further in the coming years.

In the third quarter alone, the Phoenix metro had about 35.2 million square feet of industrial space under construction after 7.3 million square feet were delivered, according to a report from CBRE Group Inc.. Demonstrating the strong demand for space, Cushman & Wakefield found the Valley has seen 17.7 million square feet absorbed, meaning the space leased minus what became vacant, through the third quarter in 2022.

Josh Tracy, vice president of real estate development for Ryan Companies, said the industrial boom in Phoenix could be attributed to a growing population with a deeper workforce pool; the Valley's proximity to the Port of Long Beach; and the strong demand for space from electric vehicles, semiconductor and aerospace suppliers. Pre-Great Recession of 2008, a lot of the industrial demand was related to the homebuilding industry with house framers, air conditioning and drywall companies being regular tenants at industrial parks, Tracy said.

Diversification of industrial space

Arizona's diversification of industry and big investments from employers such as Lucid Motors, Intel Corp., Gulfstream and Taiwan Semiconductor Manufacturing Company and the many suppliers to support the companies could suit the state — and industrial developers — well through a possible recession, depending upon how long a slowdown lasts, he said.

"Assuming we continue to see strong population growth, it makes sense that we'll continue to be in this top 10 of industrial deliveries for the next decade like we were for the past decade," Tracy said. "Phoenix is just a no-brainer location for a lot of groups."

The demand for space and ongoing material and labor shortages have also driven up building costs locally. Price per square foot increased by nearly 10% from the second quarter and 34% year over year. The median price per square foot year to date is $186, according to Colliers. Should the push to build more industrial continue in coming years, the rents would have to increase and demand will have to hold strong, Tracy said.

"The only concern would be is if the cost of capital is higher and if the economy slows down, will users start to hit pause? And then instead of tenants fighting for the buildings, will the landlords be fighting for the tenants? When your cost of capital and cost of construction is increasing, you need your rents to increase too, otherwise you'll be in trouble in the short term," he said.