The increase in new industrial development seen in the last few years has added quality, functional Class A space to the market, and tenants are willing to pay premium rental rates in order to relocate into new space.
The warehouse and distribution space delivered, or set to be delivered, in 2016 averages $0.55 per square foot on a NNN basis, a 12 percent increase than the existing market average of $0.49. New manufacturing space is even more expensive, averaging $0.68 per square foot, up 36 percent from the existing average of $0.50.
What makes new development so attractive and different? According to JLL’s Vice President Steve Larsen, it’s all about efficiency. “Landlords are building product with higher clear heights (30’ feet versus the traditional 24’ feet) and wider column spacing (52’ x 60’ feet versus the traditional 48’ x 48’ feet or less), which allows users to better optimize their space by positioning racks more effectively. Users are most interested in efficiently utilizing the cubic square footage of a building.”
Some product with these newer qualities does exist in Phoenix but is leased up, which is why new developments are in such demand, particularly in the Southeast Valley and Airport submarkets.
New development in the Southeast Valley and Airport submarkets
AZ|60, a ±225,600 total square foot development located near Baseline Road and Country Club Drive and Airport I-10, a 923,728 total square foot development located at the northwest corner of 24th Street and Rio Salado Parkway are prime examples of new developments driving rental rates. The average asking rents at these projects are well above the market average at $0.58 and $0.65, respectively. However, it is more than modern build outs that have made these two projects so attractive.
“Users who locate within the Southeast Valley tend to be more non-traditional warehouse users,” said Larsen. “Often times, production space is just one component needed. Higher technology and power to sustain other parts of operation are usually also required. This, along with a corporate environment, is something that AZ|60 is able to provide, making it very attractive to those higher tech tenants we tend to see in the Southeast Valley.”
Airport I-10 is another corporate environment but has been extremely successful due to its central location.
“This project is one of the only new developments in the Central Valley where there isn’t a lot of land,” said JLL’s Executive Vice President Pat Harlan. “The proximity and easy access to the airport is a major positive factor for distribution companies and these users are willing to pay the higher rates just to be centrally located.”
While new developments in Phoenix are still much more affordable than neighboring markets in the Southwest region, new developments will continue to boost Phoenix rental rates.
Click here to learn more about the Phoenix industrial market from our Q2 Industrial Insight report.
About the author
Kiana Cox is a senior research analyst in the JLL Phoenix office who works closely with brokerage and support professionals throughout the western region, as well as colleagues throughout the global JLL organization, to provide best-in-class research that differentiates JLL.