Impact of business in-migration and pandemic fuel record-breaking net absorption and construction
In addition, Greater Phoenix posted its largest delivery of new product in a single quarter during fourth quarter 2020, a remarkable 6.5 million square feet of new industrial space came online. This included the Valley’s first speculative project, larger than 1 million square feet, which was developed by Tratt Properties in the West Valley.
Fourth quarter 2020 marked the seventh consecutive quarter of industrial net absorption exceeding 1 million square feet. The past three months was a record-breaking quarter with 7 million square feet absorbed. Warehouse and distribution led the market, primarily in the Southwest and Northwest submarkets. During the final quarter of 2020, every submarket cluster posted positive net absorption.
Amazon accounted for 23 percent of all transactions 100,000-plus square feet completed in 2020. The online giant committed to 2.7 million square feet of new space during the year. In November, luxury online consignment retailer The RealReal signed the largest lease of the quarter. The company committed to 593,600 square feet at Liberty Logistics Center in Phoenix, taking space formerly leased by Tuesday Morning. Honeywell expanded its distribution presence by committing to 301,954 square feet at Riverside Business Park.
Direct vacancy dropped 50 basis points during fourth quarter 2020 to 7.4 percent, despite the impact of such a large delivery of new space. This is indicative of the strong demand in the market.
The Northeast submarket ended the year with the lowest vacancy rate of 3.7 percent. The Northwest submarket delivered the largest amount of new inventory this year, adding 4.5 million square feet. The Northwest market had the largest decrease in vacancy last year with a decline of 100 basis points to 4.7 percent. Large blocks of available space are very limited in the Airport Area, Northeast and Southeast Valley submarkets, with just 17 options that can accommodate a tenant of 100,000+ square feet.
During 2020, the market delivered the most inventory ever witnessed in a single year, adding 16 million square feet of industrial space. Under construction figures declined 2.2 million square feet during the fourth quarter to 7 million square feet underway. Development is being seen in the West Valley as well as the Southeast Valley. The West Valley leads the market with 5.9 million square feet currently underway. The Southeast Valley typically supports industrial buildings 125,000 square feet and smaller but is now experiencing development of 200,000-square-foot facilities and larger.
While construction activity slowed during fourth quarter, land sales of parcels 10-plus acres soared to its highest volume since 2015. More than 75 percent of these sales volume were focused along the west Loop 303 corridor.
The new South Mountain Freeway 202 expansion has attracted developers and we had two new projects started in the area during fourth quarter. Both projects are larger than 400,000 square feet and are fully available for lease. They will likely be absorbed before completion or shortly after. Buildings larger than 250,000 square feet that are currently under construction are already 44 percent pre-leased. Space is being absorbed before developers break ground, which has fueled demand for spec buildings.
One concept that has spawned from the pandemic is being tested by Walmart. The nation’s largest food retailer is considering temperature-controlled “HomeValet” containers for contactless grocery delivery. If this concept gains traction and is copied by other grocers, we will experience a higher demand for space required to execute the new business model.
Market rents for industrial space increased 6.78 percent during 2020, and 1.61 percent during fourth quarter, to $0.63 per square foot. Distribution buildings posted the largest rental rate gain during 2020, increasing 9.05 percent to $0.52 per square foot. The Airport Area once again led the market in rental rate increases, with a 2020 improvement of 11.2 percent to $0.80 per square foot. This land-locked submarket has availability constraints that are motivating the rate increases.
Rental rate increases paused during the first months of the pandemic, but began again and caught up to the rate increase trajectory witnessed in 2019. As new product comes online, prices will increase. Capital is starting to flow into purchase of value-add opportunity properties that will be renovated and repositioned to compete with newer product.
Investment sales of industrial properties in the fourth quarter outperformed third quarter by 124 percent. Yet, the volume was down for the quarter compared to fourth quarter 2019. During the last three months of 2020, we closed $1.09 billion in sales volume for a total of $2.5 billion during the year. The median price per square foot rose 9.7 percent over-the quarter and 21.1 percent over-the-year to $122 per square foot. Cap rates compressed to 6.2 percent.
The largest transaction was the newly completed Chandler Airport Commerce Park distribution building that offered 201,784 square feet, selling for $87,725,000 ($435 PSF). That property is fully leased to Amazon. Two bulk sales were completed during the fourth quarter. EJM sold 15 properties to Starwood Capital Group, 1.3 million square feet for $181 million. In October, Harris Properties purchased 14 properties totaling 593,000 square feet from D.F. Properties for $18.3 million.
Greater Phoenix was listed as the country’s top market for talent attraction, according to EMSI’s Talent Attraction scorecard released in December 2020. The metro area has recovered nearly 79 percent of the initial jobs lost during the pandemic. Companies that previously looked to top-tier metro areas are now eyeing Phoenix as a rising location for their growth. New companies entering the Greater Phoenix market are not just seeking warehouse space, but also manufacturing facilities. These companies are attracted to the lower cost of doing business and our connectivity to nearby markets. Some companies are already looking to expand their space here, even before occupying their initially leased square footage.
Leasing activity will remain strong in 2021, due to the continued effects of COVID-19 and the rapid population growth. Construction of new space will continue at full pace as we see every area of the market with projects underway or planned for development very soon. Developers are becoming creative with efforts to re-purpose old buildings and parks in land-locked cities.
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