After an impressive end to 2013, the industrial sector slowed slightly this quarter; both leasing activity and sales volume decreased. Rental rates inched upwards in Q1, continuing the long term trend of increasing rates. Despite positive first quarter absorption, vacancy rates saw a small increase in Q1. However, long-term vacancy trends continue to decline in all industrial property types, except for big box inventory.
In Q4 of 2013, net absorption totalled 2,669,041 SF, making up for a slow Q2 and Q3 that posted negative numbers. 2014 was vibrant with activity in the first couple months, but fizzled into a net absorption of only 479,422 SF. This decrease was reflected in leasing activity as well; last quarter 4.3 million SF was leased in the Phoenix Metro industrial market, while just 2.2 million SF was leased in the first quarter of 2014. Sales Volume also fell this quarter, coming in at $176 million, down from the $331 million seen at the end of 2013.
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The Metro Phoenix office sector continues to improve as the New Year gets underway. With vacancy rates continuing to decline and rental rates steadily increasing, the outlook is positive for a stable 2014 for the sector as it transitions out of the recession. New product deliveries and construction also increased in the first quarter of the year, with 272,710 SF being delivered and over 1.9 million SF in the pipeline.
Vacancy rates for the first quarter of 2014 dropped significantly, coming in at 18.7% overall, down from 19.4% at the end of 2013. Vacancy has seen great strides in the last year; in Q1 2013 the vacancy rate sat at 20.5% overall for the office sector. Vacancies also seem to be leveling between product types; when tenants could no longer afford their high-end spaces, vacancy rates increased dramatically for Class A space, and then began to readjust as those products became more affordable in the last two years and tenants were able to upgrade. At the beginning of 2011, the difference in vacancy percentage between Class A and Class C was hovering around 8%, while now they are almost identical. This will begin to level the playing field for all product types instead of the focused activity in higher end space.