Resurgent Hiring in Industrial Trades a Bright Spot, Though Elevated Vacancy Weighs on Rents, Operations

Phoenix, AZ – August 1, 2011 – (RealEstateRama)
ECONOMY
Improvements in blue-collar industries account for a significant share of Phoenix economic growth in 2011, despite choppy early year hiring. Total metro employment grew by 0.9%, or 14,900 positions. Manual-trade payrolls, in contrast, expanded by a healthy-1.1% year to date with the addition of 3,800 workers. The Valley’s manufacturing sector notched the most hires, adding 2,500 employees and offsetting the combined loss of 700 construction and transportation and utilities personnel through the second quarter. Moreover, major expansions by companies such as Federal Express, First Solar and Easy Energy Systems Inc. will boost the economy and leasing in the near term. Through the extended outlook, sales tax legislation may push more companies like Amazon to relocate from California to Arizona, further supporting industrial space demand. Although international and domestic concerns could dampen growth in the second half, the economic recovery is expected to gain momentum. Metr owide staffing levels will increase by a projected 39,000 positions, or 2.3%, in 2011, while blue-collar industries will add 12,500 workers, a 3.7% increase. National payrolls will rise by 1.65 million positions, or 1.3%.

FUNDAMENTALS
While the first quarter lull in blue-collar hiring yielded unimpressive net absorption, resurgent payroll growth in the most recent three months pushed net absorption to 1.5 million square feet. Rising employment levels and increased leasing activity have compressed vacancy, as the rate is down 60 basis points in the past six months and rests 180 basis points below the average reported in the second quarter of 2010. As a result, rent reductions have begun to ease. Asking rents were unchanged between the first and second quarters; however, the lack of a decline does not indicate a rebound. Rather, lease-up of aggressively priced and sublet space is leaving more expensive properties on the market, temporarily buoying rents. Landlords, nevertheless, will continue to offer competitive rents and offer sizable concessions to attract tenants. For warehouse product, steady space demand has tightened vacancy for five consecutive quarters. In fact, leasing of warehouse properties in th e Southwest submarket accounts for nearly half of all industrial net absorption thus far in 2011, propelled by a flurry of activity from regional and national distributors. Industrial market momentum will persist in the coming quarters. For the year, vacancy will retreat 140 basis points to 14% and rents will decrease 3.8% to $0.50 per square foot.

SALES
Institutional buyers are keeping an eye on the Phoenix market for top-of-the-market, sub-8% cap rate deals like the 10 Chandler and Home Depot distribution center acquisitions. Nevertheless, owner-user and private buyers have led the charge back into the Phoenix industrial sales market, constituting 57% of all buyers year to date. Falling prices are encouraging expanding businesses and smaller investors. As a result, the number of industrial sales made is up 75% year over year, while the median price is down 4% at $59 per square foot. Sturdy demand for local industrial properties, combined with steady sales at both ends of the quality spectrum, will produce erratic pricing trends in the near term. Cap rates for most properties, though, are anticipated to average in the high-8% range to low-9% range through year end.

ABSORPTION & EMPLOYMENT
The metro’s manual-trade employers continue to add workers at a healthy clip. So far in 2011, local blue-collar headcounts have swelled by an estimated 3,800 positions, or 1.1%, up from the creation of 3,100 jobs during the last half of 2010. Gains are most robust in the manufacturing and wholesale trades, as the 4,200 new hires made year to date have offset layoffs in the construction field. Industrial space needs have expanded in step with payrolls; 1.5 million square feet of net absorption during the second quarter lifted total absorption to nearly 2.2 million square feet over the past six months. With numerous companies such as Amazon and Federal Express expanding in the Valley, staffing additions will accelerate through year end. In 2011, blue-collar businesses will hire 12,500 workers, growth of 3.7%. As a result, net absorption will rise to 5.1 million square feet.

VACANCY
Vacancy fell a modest 10 basis points in the first quarter, due, in part, to slower employment growth in February and March, but resurgent hiring and leasing during the most recent three months pushed the rate down 50 basis points to 14.8%. Vacancy now has decreased for five consecutive quarters, and the current rate averages 190 basis points below the first quarter 2010 peak. Increased demand for warehouse space has driven the overall industrial market recovery. Warehouse vacancy presently stands at 14.1%, 190 basis points below the year-ago rate. Flex vacancy, conversely, ticked up 20 basis points year to date to 20.7%, though the second quarter rate is 110 basis points below vacancy in the second quarter of last year. A steadier economy in the second half will underpin consistent industrial market leasing, tamping down vacancy to 14% by year end, a 140 basis point annual decline.

RENTS
Between the first and second quarters, average monthly asking rents held steady at $0.51 per square foot, but face rents tumbled 1.3% during the same period when converted to annual totals. Additionally, as aggressively priced space is leased and removed from available inventory, the remaining higher-priced, still-vacant space will underpin temporary asking rent upticks over the coming quarters. Nevertheless, landlords, will continue to offer sizable concessions to secure tenants. Greater occupancy concerns among flex properties caused metrowide asking rents to fall 5.3% to $0.89 per square foot in the past six months. Warehouse asking rents dipped 2.2%, or $0.01, to $0.45 per square foot. Demand-driven rent gains will elude industrial owners in Phoenix this year, and asking rents will slip 3.8% to $0.50 per square foot.

SALES & INVESTMENTS
Strong investment activity involving both stable assets and distressed deals has underpinned erratic industrial pricing trends so far this year. On a quarter-over-quarter basis, industrial values have risen, as the median price has surged 14% to $63 per square foot. In the past six months, however, the median price was $59 per square foot, 2% below prices throughout 2010. The increased share of operationally stable industrial sales has compressed cap rates from 9.3% last year to an average of 9% in 2011. Sales velocity has increased 7% in the previous three months and 75% year over year. The number of warehouse sales has accelerated 36% in the past one-half year, while the median price has receded 8% to $57 per square foot. So far in 2011, flex velocity is up 29%, and the median price has edged up 3% to $70 per square foot.

About Lee & Associates Arizona Research Division
The Lee & Associates Arizona Research Division regularly publishes economic and commercial real estate reports. Publication are available at our web site at: www.LeeArizona.com