As the industrial real estate market in Arizona experiences a monumental transformation, it’s crucial for tenants and occupiers of space to understand how the current surge in new construction deliveries and ongoing developments can impact them and their real estate strategy going forward.
Arizona’s industrial market, particularly in the Phoenix metro, has been inundated with historic levels of supply, most of which is being built on a speculative basis. In the latter half of 2023 alone, developers delivered over 23 million square feet of new space, surpassing the completion totals from 2017 to 2019 combined. This has caused the vacancy rate to surge from 4% to over 9% as of Q1 2024.
Despite the spike in supply, Arizona continues to lure tenants with its strong labor force, strategic location, and positive long-term outlooks. Industries such as logistics, manufacturing, semiconductors, construction as well as food and beverage remain the driving forces behind the absorption of space. Headlines tend to focus on big players such as Amazon, TSMC, and Intel, but there is a diverse mix of exciting new occupiers continuing to enter Arizona or expand within.
More than 13 million square feet was absorbed in 2023, which was down from 2022 and 2021, but strong nonetheless compared to approximately 6 million in 2019 (pre-pandemic).
Even with the optimism Arizona brings, the future predicts further vacancies as nearly 38 million square feet of developments are still underway, accounting for more than 8% of the existing inventory. The Loop 303 corridor and Phoenix Mesa Gateway Airport submarkets are the main drivers of new development. These areas will likely experience the quickest rise in vacancy, primarily due to the overall concentration of supply, as well as being newer areas, compared to the more established, infill locations more central to the valley.
Rental rates stabilize
In this climate of booming supply and softening tenant demand, rental rates’ growth trajectory is beginning to stabilize. Throughout 2023, asking rents surged by about 10%, signaling a deceleration from the 16% annual growth recorded in 2022. It’s projected that the higher vacancy rates will lead to a continued deceleration of rent growth moving into 2024.
On the contrary, owners of smaller bay properties, typically under 50,000 square feet, might be able to maintain the leverage to sustain rent growth, given the scarcity of new construction in this size. Conversely, larger distribution properties over 100,000 square feet will likely see the most significant slowdown in rent growth, as they make up the majority of upcoming unleased inventory.
For those navigating this constantly evolving industrial real estate landscape, the current situation in the Valley underlines the importance of strategic planning and understanding your current buying power. Industrial tenants that are facing upcoming lease expirations should proactively begin to work with their tenant-only adviser to develop a strategy that best aligns with their their short, medium, and long-term facility needs. Better days are ahead for the tenant.
Ryan Steele is a partner at Scottsdale-based Keyser.
Ryan Steele
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