The local warehouse/distribution market, most recently counted at 128.4 million square feet, launched a strong recovery last year, led by activity in the vibrant western and southwestern suburbs. The decline in absorption numbers reported to date in 2012 likely represents a reduction in the availability of large quality spaces rather than a decline in market vigor. Demand, in any case, remains well ahead of same-term new supply. Indeed, only one warehouse/distribution type project—a build-to-suit—has completed construction year-to-date, and only a single project was under way per the date of this report. With vacancy declining, rent growth running positive, and demand remaining strong, speculative development of large projects, if limited in number, is making a return.
With a significant high-tech industry base, concentrated most heavily in the cities of the East Valley, Phoenix hosts a substantial Flex/R&D real estate market as well. This sector shows recent stabilization. Net absorption is running positive; vacancy, while high, is declining; and growth has returned to average rents. Data center activity and development have become increasingly significant factors in this area and for the region as a whole (see Special Real Estate Factors).
Following its 19.9% third quarter 2010 peak, the warehouse/ distribution market vacancy rate has been beating a more or less steady retreat amid resurgent demand and constrained development. By the end of the latest quarter, the rate had declined to 17.8%, a drop of 20 basis points for the period, a decline of 110 year-over-year. Additional declines at a moderate pace are expected as the trend continues. From the late 2010 peak, meanwhile, the volume of vacant stock has decreased by more than 2.5 million square feet, to about 22.8 million square feet.
The local Flex/R&D sector also suffered from high recession-related vacancies. Here, however, the subsequent improvement has been less steady. At 23.1%, the second-quarter vacancy rate was unchanged from the quarter before and was down 80 basis points year-over-year. The same rate, however, was recorded for this market segment as long ago as third quarter 2010. For all industrial product categories combined, Cushman & Wakefield puts second quarter 2012 vacancy for 263.3 million square feet of inventory at 12.2%, a 50 basis-point decline for the period, a 200 basis-point decline year-over-year, and the lowest rate recorded by this source for this market in four years.
SUPPLY AND DEMAND
Second quarter, with 222,000 square feet of positive net absorption, was the eighth quarter in succession to see positive warehouse/ distribution activity. The total year-to-date, alongside no new space delivered, was 413,000 square feet. Despite the vaunted strength of the market, the net absorption total for 2011 ran at more than 2.1 million square feet. The slowdown suggested by the numbers for 2012 to date, however, likely results in significant part from a growing shortage of large quality spaces rather than from a weakening of demand. Recent reporting by Jones Lang LaSalle has spoken to this issue. And in its second-quarter report on the local market, Cushman & Wakefield cites “the lack of available big-box space on the market” and only one speculative development breaking ground. “Companies are seeking state-of-the-art space, and plenty of it,” a recent issue of Commercial Property Executive reported. “In Phoenix, we have seen an expansion of a lot of retail and consumer goods products companies that see that the market is logistically a good location to service customers in the Southwest and back into California,” an executive with The Alter Group informed this source. “Amazon seems to agree. The company leases more than 1 million square feet at the 162-acre Buckeye Logistics Center, where Kellogg’s also occupies the tenant roster.”
New supply additions have been modest. The 716,000 square feet that completed construction all told in 2011 amounted to but a fraction of the year’s absorption total. And only one warehouse/distribution project, a 260,700-square-foot build-to-suit in Mesa, has completed year-to-date in 2012. Per the date of this report, moreover, only one such project—a 603,900-square-foot facility in west suburban Avondale—was under construction. Other projects, meanwhile, are beginning to line up, including large speculative facilities in the suburban southwest from The Alter Group and Seefried Properties. (See the Submarkets section for more information on these and other significant projects and submarkets.) Reis reports more than 30 million square feet of warehouse/distribution space in the planned-proposed pipeline market-wide per the date of this report, most of which is “proposed” (in some instances the proposed space may reflect long-range plans for and entitlements at business parks with little or no current standing inventory). Of this sum, nearly 27 million is located in West Valley business parks.
Positive net absorption of 60,000 square feet in the Flex/R&D sector during the first half of the year was accompanied by no new supply additions. Per the date of this report, 305,000 square feet of Flex/R&D product was under construction in two projects (in Glendale and Chandler). Along similar lines, demand for and development of data center facilities have been significant growing trends (see Special Real Estate Factors). And the Valley of the Sun is proving to be congenial to sun-based energy business. The 1.3-million-square-foot first phase of a 5.3-million-square-foot manufacturing complex for First Solar is under way in southeast suburban Mesa.
Large losses in average asking and effective lease rates in the warehouse/distribution sector in 2010 and 2011 will finally be replaced by the resumption of growth in 2012. Indeed, the return to positive ground occurred in the fourth quarter last year alongside a very strong net absorption performance. While the preceding losses will not soon be redeemed, the new growth is not insignificant. At $5.26 psf and $4.72 psf, mean second-quarter asking and effective rents were up 0.4% and 0.6% for the period following identical growth rates the quarter before. Additional gains are expected for the remainder of the year.
Rent growth in the Flex/R&D sector also finds itself newly returned to positive turf. Asking and effective averages for second quarter were $9.99 psf and $8.78 psf, up 0.2% and 0.7% year-to-date. Growth rates should increase moderately over the remainder of the year. For all industrial product types combined, Cushman & Wakefield puts the second-quarter mean asking lease rate at $6.96 psf, up 1.8% year-over-year.