Year-End 2012 Industrial Finishes Strong As CRE Recovery Takes Shape

PHOENIX, AZ – January 11, 2012 – (RealEstateRama) — The 2012 Phoenix Industrial Market posted a strong fi nish after a few bumps in the road earlier in the year. The year began with negative absorption in the fi rst quarter after a very strong Q4 11. The economy was stalling and investor confi dence seemed to be on the run. It was as though the industrial sector had suddenly backtracked. As the second quarter drew to a close, the sector came roaring back, posting nearly 2.5 million SF of positive absorption. There was a dip in the third quarter, but the fourth quarter showed the stamina most expected from this resilient sector. With the economy continuing to improve on many fronts, positive momentum is expected to continue throughout 2013.

As vacancy rates continue to decline, availability in certain submarkets for specifi c building types has declined as well. Large build-to-suit and spec projects have broken ground in areas where high demand for large distribution and manufacturing space is limited such as the Southeast and Southwest submarkets. “Adding to the construction momentum is the tight Los Angeles and Inland Empire markets that are facing low inventory levels but have little room to expand,” said Lee & Associates Senior Research Analyst, Matt DePinto. “Add in a recent California business tax increase and a dramatic shift toward Arizona could begin to take shape,” he added. The Greater Phoenix Economic Council (GPEC) and the Arizona Commerce Authority are working diligently to lure businesses to Arizona on the heels of California’s tax changes.

There are still challenges ahead. Deal velocity has not met expectations, as the number of lease deals per quarter has remained low compared with historic levels. Total SF leased per quarter is also down somewhat signifi cantly, but it is tempered by move-in activity from previous quarters. Another area that continues to struggle is asking lease rates. There has been a slim quarterly increase in asking rates since Q2 11, but the rate of growth has been insignifi cant. Vacancy rates remain historically high for the Phoenix market, which keeps rental rates from rising. Vacancy could drop below 10% by early 2014.

The Fundamentals
The Phoenix industrial sector posted a 12.7% vacancy rate, down 60 basis points from last quarter and 90 points since the beginning of 2012. This is the lowest vacancy rate in 19 straight quarters going back to Q3 2008. Net absorption posted at 1,953,002 SF for the quarter and a year-to-date total of 4,813,389 SF. That’s a signifi cant 2 million SF less absorbed than in 2011. Economic uncertainty in the economy has caused many companies to put off expansion and investment until tax and regulation uncertainties are resolved. It may take most of 2013 to rev up activity after national economic decisions fi nally go into effect.

Building completions totaled just over 2 million SF this quarter and 2,894,298 SF year-to-date. There are currently 14 industrial buildings under construction at year’s end, totaling 4,775,404 SF. Of that total, 1,781,804 SF is being constructed as spec development, such as Prologis Park Riverside, Elliot Business Park, Building 6 and Coldwater Depot.

Rental rates remained at $0.51 PSF again this quarter. However, there were only 5 submarkets with negative rental rate growth this quarter compared with 7 submarkets last quarter, pushing overall rental rate growth up 0.7% compared to 0% growth last quarter. Sluggish rates may be with us for some time.

Leasing activity remains sluggish at 2,499,956 SF and is down 39 % from last quarter and is at its lowest quarterly total SF leased per quarter since Q3 07. As a lagging indicator, commercial activity can be a year removed from current economic trends. Recent improving economic conditions should increase activity steadily through 2013. The largest lease transaction of the quarter was for the i/o Data Center lease of 145,540 SF at 2550 N. Nevada St. in Chandler.

Sales activity is down this quarter. There were 138 sales transactions for a total of $161,840,639. Average price per square foot was $55.87. This total is down signifi cantly from last quarter’s nearly $225 million in sales transactions. Availability of large distribution space built after 2000 is extremely limited and has forced some to consider build-to-suit. The quality of the remaining Valley inventory is fast becoming obsolete for the needs of current users. Tenant improvement costs will continue to rise for existing inventory which moves the discussion toward new development.