Phoenix sets breakneck pace for industrial development in Q4, report shows

Phoenix sets breakneck pace for industrial development in Q4, report shows

Article Originally Posted By PhoenixBusinessJournal On January 18, 2022

Record leasing, vacancy and construction continue to be the story for Phoenix metro's industrial market in the fourth quarter of 2021.

Industrial construction activity remained high in Q4 with nearly 30 million square feet under development, while about 33% of those were already leased or sold to users, according to CBRE Group Inc.'s fourth quarter industrial report. The fourth quarter also saw 26 buildings totaling 4.4 million square feet completed, which brought the annual amount of completed space to 14.1 million, another record for Phoenix metro. Most of the activity occurred in the southwest, northwest and southeast parts of the Valley.

Also, notably, according to a Cushman & Wakefield report, the Phoenix metro ranked fifth in the U.S. for buildings under development. The metro only ranks behind Dallas-Fort Worth, Pennsylvania interstates 81/78 distribution corridor, the Inland Empire in Southern California and Atlanta, according to the report.


Manufacturing demand

Demand in the Phoenix area continues to be fueled by the growth of e-commerce and Covid-19, but manufacturing demand has also started to increase in the Valley, John Werstler, senior vice president with CBRE in Phoenix, said.

Companies moving operations to the U.S. due to supply chain issues and developers bringing new speculative development to the metro are also driving demand in addition to businesses moving out of California, Werstler added.

"Because of all the activity, because of the focus from just about all the major capital guys, Phoenix is now on everybody's radar to either develop in, put capital in," he said. "It'll never be a Dallas or LA, Inland Empire market, but it's no longer just an ancillary market."


Werstler said demand is expected to continue this year. In Q4, about 22 projects totaling 4.1 million square feet broke ground, most of which are speculative warehouse and distribution facilities.

The outlook for Phoenix metro is strong due to an "attractive" workforce, affordable land pricing with active developers and strong tenant activity with new users in the market. Distribution, third-party logistics, e-commerce and food and beverage users are also bringing an increased demand for space, according to CBRE.

Strong leasing continues

Overall, the metro area saw more than 6.2 million square feet of net absorption in the fourth quarter, which is the amount of space that was leased minus the space that became vacant.

This brought the yearly total to 21 million square feet, the highest level of net absorption on record for the metro, according to CBRE.

"That was by far the best year we've ever had," Werstler said. "A typical market, we would do, low teens, mid teens ... we're now a market that I think on a consistent basis is going to see net absorption north of 20 million. That's been a big change in the market."

Leasing activity also hit records well above the year prior, while the southeast and southwest Valley markets continued to dominate leasing activity — combined the two contributed to 18.7 million square feet of net absorption through 289 transactions in 2021, CBRE data shows.

Pat Feeney, executive vice president for CBRE, said most of the industrial leases signed in Q4 were for 600,000 square feet in size or less.

Some of the top leasing deals in the fourth quarter included Home Depot, which leased 1.3 million square feet in Goodyear, State Logistics, which leased 341,000 square feet in Tolleson and USPS, which leased 285,000 square feet in Tolleson.

Newly completed build-to-suit projects like Red Bull and XPO Logistics were some of the biggest contributors to the strong leasing activity in the fourth quarter.

Vacancy in the Phoenix metro overall hit 3.7% in Q4, while direct average asking triple-net lease rate was 81 cents per square foot, CBRE data shows.