The Phoenix economy exceeded expectations in 2014, and despite a seasonal slowdown after the holiday season, the first quarter of 2015 kicked off in the right direction as well. The core industries in the Valley, including financial services, tourism, and professional services, have been driving much of the growth. Phoenix is outperforming the Western U.S. in year- over -year nonfarm payroll growth and continues to see strong levels of hiring. Unfortunately, a few pockets of weakness continue to delay a full recovery in Phoenix. Construction and Manufacturing industries within the Valley are stagnant and have not added many new jobs since the recession. The single-family housing market has cooled and developers remain stubborn as new construction permits remain at record low levels. Demographic trends within the Phoenix metro area continue to defy limited new residential construction. The Valley is seeing population gains accelerate and are expected to exceed the historical average soon. A majority of growth stems from migration into Phoenix as evidenced by the fact that the local pool of residents grew nearly twice as fast as the nation’s in 2014. These demographic trends support growing household formation, labor force expansion, and additional residential construction in 2015.
The industrial market across the Phoenix metro wasted no time getting started in 2015. The first quarter of the year has already recorded over 1.6 million square feet of positive absorption gains across the Valley. Many of these gains have been concentrated across warehouse and distribution product given the market slowdown across semiconductor and manufacturing industries. Corporate occupiers have absorbed 1.3 million square feet of warehouse and distribution facilities as they expand their operations to meet increasing market demand.
Despite strong absorption gains, industrial vacancy remains stagnant in Phoenix. Development activity remains very active and new construction deliveries are on par with absorption levels, resulting in minimal changes to total vacancy. Tenants are moving into newly constructed facilities or custom build-to-suit options as older, existing options sit empty. 11.2 percent of all industrial properties are currently sitting vacant waiting for tenants while 2.6 million square feet of new industrial space is under construction and expected to deliver over the next 12 to 18 months.
A large majority of the construction delivered in the first quarter of 2015 was build-to-suit for many large corporate occupiers. Only 3 of the 7 newly constructed facilities were speculative with available space ready to lease. A large Class “A” warehouse and distribution facility located at 7775 West Buckeye Road is the most notable speculative delivery of the quarter, adding 684,420 square feet of vacant space to the market. PepsiCo, Cookson Doors, Dreamfoam Bedding, and Rinchem Company are all moving into new facilities that were design build totaling approximately 971,908 square feet. This trend of build-to-suit construction has actually reversed in the current development pipeline. A large majority of properties currently under construction are speculative with only 29.4 percent pre-leased.
Healthy absorption levels and a robust development pipeline signal a healthy and growing market. These trends, coupled with rising rental rates are resulting in leverage slowly shifting in landlords’ favor. However, many large block availabilities in the market continue to weigh heavy on the minds of owners and developers.
Evidence is appearing that Phoenix is slowly shifting from recovery to expansion. Growth in income will be the underlying catalyst as residents push the local economy forward. Finance and healthcare will continue to lead the market and support gains in white-collar services. Yet, the last obstacles of a soft housing market and public sector grief are standing between Phoenix and its trajectory toward above-average, long-term performance. Record levels of occupancy gains are justifying much of the development activity that is happening in the Valley. Although falling vacancy would shine a positive light on Phoenix, the fact that absorption is keeping pace with product that is being newly delivered is evidence of an accelerating market. Absorption is expected to remain strong through the rest of 2015 as corporate occupiers continue to expand their operations and take advantage of Phoenix’s premiere real estate.
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