Vacancy falls to 2.6 percent with 35.2 million square feet under construction
PHOENIX – The Greater Phoenix industrial market posted its strongest quarter in history during, hitting the mid-year point with the area’s lowest vacancy rate ever recorded, according to a report released by Colliers in Arizona.
Vacancy fell 140 basis points during second quarter to a remarkable 2.6 percent. Increased tenant demand was felt throughout the entire metro area, leading every submarket (except Northeast Valley) to post decreased vacancy quarter-over-quarter and year-over-year. For the second consecutive quarter, the Southwest submarket clusters felt the largest decrease in vacancy, declining 320 basis points over the quarter to 1.9 percent.
This historic low vacancy left the market extremely tight for tenants seeking space. Larger blocks of space are in such high demand that only eight existing buildings offer options for tenants seeking 150,000 square feet and only six options offer availability for tenants exceeding 300,000 square feet.
Second quarter marked the fourth quarter in the past two years in which net absorption exceeded seven million square feet. Second quarter brought an impressive 8.9 million square feet of absorption, topping the previous quarter as the highest single quarter of net absorption ever posted for the Phoenix industrial market. During the past four quarters, the industrial market averaged 7.1 million square feet of quarterly net absorption. Assuming this pace continues, the market will surpass 30 million square feet of absorption for the year 2022.
Twelve transactions exceeding 150,000 square feet were completed during second quarter. Sportswear company Puma signed the largest lease during the quarter, committing to 1.02 million square feet at 303 Crossroads in the Northwest submarket cluster. In May, Logistics Plus signed a lease for 542,975 square feet at the recently sold Cabot 303 project. Strong tenant demand and low vacancy promoted strong leasing in new projects. Only 12 percent of the 12.5 million square feet that have been completed this year were still available at the end of second quarter.
Rental rates have been pressed higher in these robust market conditions, rising 20.2 percent year-over-year and 6.2 percent over the quarter, reaching $0.78 per square foot. The market hit its largest increase year-over-year, outpacing the first quarter’s increase that previously held the record for largest growth. Since 2019, rental rates have increased an annual average of 7.7 percent. During the past two years, they have risen rapidly. Mid-year rental rates were 28.4 percent higher than mid-year 2020. Every submarket cluster in metro Phoenix experienced rental rate increases both quarter-over-quarter and year-over-year.
Since the start of the pandemic, each quarter set a record for product under construction. Currently, 35.2 million square feet of new product is under construction, marking an increase of 3.68 percent over first quarter. More than 32 percent of the space is pre-leased and real estate experts theorize this figure should be higher. However, rapidly increasing rental rates and delays of construction materials have led developers to postpone signing deals to make sure they can achieve true market rates when the buildings are delivered. Approximately 75 percent of the buildings under construction are located within the Northwest and Southwest submarket clusters.
During second quarter, 6.7 million square feet of new inventory were added in second quarterThe largest was Elliot 202, the 1,194,923-square-foot project completely leased to Amazon. The 10 West Commerce Park added 862,622 square feet to inventory and is leased to toy company Funko.
Investment sales volume during second quarter was twice as large as second quarter 2021. Sales volume rose 60.4 percent quarter-over-quarter ending at $1.39 billion. Median price per square foot rose 7.4 percent quarter over quarter and 28.7 percent year-over-year to $173. Sales volume for the first half of 2022 outpaced the first half of 2021, increasing 52 percent. The median price per square foot is up 21.5 percent compared to the first half of 2021. Southeast submarket cluster posted the most transactions for the quarter, making up 30 percent of all sales. The Southeast completed the highest sales volume at $448 million. The largest single transaction of the quarter was 10 West Commerce Park, the 862,622-square-foot project sold by developer LGE to Cohen Asset Management for $128.6 million ($149 per square foot.)
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