The Phoenix Industrial Market showed modest improvement over the previous quarter’s relatively weak progress. The figures pointing to positive momentum in the industrial sector evolve around the large amount of space that was absorbed, as well as the downward trend in vacancy. However, it should be noted that the vacancy rate for the second quarter of 2012 is still approximately 4% above historical norms. Phoenix metro employment growth is expected to sustain advances during the remainder of 2012, yet levels will be down 50% of pre-crisis levels, according to data from Moody’s Analytics.
Absorption figures through the second quarter marked a significant turnaround for the industrial market. Nearly 2.3 million square feet of space was absorbed this quarter compared to approximately 280,000 square feet absorbed in the first quarter of 2012. The strong activity this quarter sets the stage for achieving the improved forecast for the industrial sector in early 2012. Both distribution and warehouse properties experienced absorptioin growth with nearly 1 million square feet absorbed in each property type.
Lease transactions noticed a slight increase in square footage, bringing total square footage to 3.65 million during second quarter 2012, an addition of nearly 400,000 square feet. The three largest leasing transactions this quarter were all in the Southwest Sub-Market. Total Warehousing a provider of third party logistics, signed a 358,830 square foot lease at 435 S 59th Avenue in Phoenix, MiTek, a supplier of engineered products, entered into a 259,200 square foot lease at 7890 W Lincoln Street in Tolleson, and Exel, a supply chain and solutions provider, signed a 237,176 square foot lease at 7210 W Van Buren Street in Phoenix.
The Phoenix industrial vacancy rate decreased slightly dropping to 13.4% compared to 14.2% in the first quarter of 2012. Flex building space continues to have the highest vacancy rates, with vacancies at 21.5%. Warehouse space posted the lowest levels at approximately 12.5%. Forecasts suggest vacancy levels for warehouse space will continue diminishing through 2014. Manufacturing space had low, though improving, absorption numbers. We expect continued increases in demand for manufacturing space. Advances in technology are fueling spending for both the aerospace and defense industries, suggesting further investment in manufacturing space. One such example is the $5 billion investment by Intel to expand their facility in Chandler.
The analysis of the industrial market shows positive trends and modest growth prospects, albeit slow, identified by the increases in absorption across all property types, and the downward movement in vacancy rates. This improvement is not yet strong enough to support higher rents. Rental rates increased 0.8% over the previous quarter from an average of $.50 per square foot ($6.01 annually) to $.51 per square foot ($6.06 annually). As economic conditions continue to fluctuate and fuel uncertainty, landlords are choosing to maintain lower rental rates to attract tenants and fill their vacant space. Vacancy needs to drop significantly for the pricing power scales to shift from tenants to landlords.
Construction faced a mild compression. Delivered space decreased this quarter to approximately 327,000 square feet down from approximately 560,000 square feet delivered in the first quarter of 2012. There were no new construction starts in the second quarter however the start of the third quarter gave rise to approximately 3.3 million square feet of space under construction. According to Phoenix Business Journal, third quarter 2012 should yield construction of approximately 1,190,000 square feet of speculative building projects. The first project, Coldwater Depot will be developed as a cross dock distribution warehouse space. The 56-acre site is in the city Avondale, along Interstate 10 and 127th Ave. The first phase will build out around 600,000 square feet. The second project, Estrella Logistics Center, will be a 592,000 square foot distribution center. The 38.4-acre site is located in the city of Phoenix, serving as a speculative distribution center.
Cap rates trended down two percentage points this quarter, to 6.93% from 8.66%. This decrease suggests that there is an excess of capital to be deployed, a growing interest in industrial sector properties, and a limited supply of industrial space. Nationwide, significant industrial purchases totaled $1.9 billion, a 17% increase on a year-on-year basis, according to Real Capital Analytics. Large REIT’s increased their holding of industrial properties. Blackstone Real Estate Partners purchased a portfolio consisting of 65 industrial properties in the central US for $770 million. Large scale purchases such as this outline our perspective that the industrial market will continue to press forward with positive momentum, ultimately playing a major part in the recovery of Arizona’s economic health.