Valley Industrial Market Prepares For Its Biggest Deals In History

12 Jul, 2007, Phoenix, AZ

The metropolitan Phoenix industrial market posted strong absorption for the first half of this year, preparing for some of the Valley’s largest industrial deals in history to be signed during the next six months, according to a report released today by Cushman & Wakefield of Arizona, Inc.

“We’ve suffered from pent-up demand and lack of supply for too long,” says Jim Wilson, senior director with Cushman & Wakefield. “Mega warehouses are being completed in the Southwest Phoenix submarket and the availability is resulting in some very large leases.”

During the first six months of 2007, metropolitan Phoenix had direct net absorption of 1,413,641 square feet. Approximately 914,210 square feet of that absorption was experienced in the Southwest Valley. Home Depot leased 380,000 square feet near 51^st Avenue and Buckeye Road. Ulta Cosmetics pre-leased 328,995 square feet at 46^th Avenue and Lower Buckeye Road. Pilkington North America leased 203,245 square feet at 73^rd Avenue and Buckeye Road.

“Leases exceeding 200,000 square feet are no longer a rarity in this market,” says Wilson. “Our city has grown up and the size of our industrial deals has followed. Metro Phoenix is now a very noteworthy hub of warehouse/distribution activity for the western United States.”

Absorption figures for mid year 2007 fell below those of mid year 2006 when 2,298,000 square feet had been absorbed at this point. “The shortfall for this year is due to two factors. First, we had demand, but not enough supply to complete transactions and post the absorption. Second, during this last quarter we returned the LeNature building to the Sky Harbor area inventory, which decreased our absorption figures by 539,686 square feet,” says Wilson.

The Southeast Valley experienced approximately 528,923 square feet of direct net absorption year-to-date. This hub of technology and “flex” space has enjoyed the upswing of business expansion in the manufacturing and service fields. “We’re seeing a noteworthy amount of new development near the Chandler airport,” says Wilson. “Available space is limited in that area, so the land will sell out quickly and the region will be built-out in the short term.”

Industrial construction activity currently outpaces the absorption of space, but that is not expected to continue. Approximately 3,687,210 square feet of new space have been added to the market during the first six months of 2007. Another 7,472,991 square feet are under construction, with 4,400,145 square feet of that building activity located in the Southwest Valley.

“We’ve completed more than 1.6 million square feet of leasing in just the last few weeks,” says Wilson. “Absorption at year end will easily exceed five million square feet and we’re confident that new buildings coming online today will rapidly lease.”

Direct vacancy of industrial space rose slightly during the second quarter, from 5.7 percent at the end of March to 6.1 percent at the mid-year point. “We experience fluctuations in vacancy as new inventory is added and we have a period of time for lease-up. Vacancy may rise a bit more, but we anticipate it will stay in the very healthy range for the duration of 2007.”

As new buildings are added to the Valley’s inventory, rents have dramatically risen. Land prices and elevated construction costs have forced developers to increase rental rates as much as 20 percent. Some experts feared that “sticker shock” might result in a downturn in demand, but that has not taken place. “Users who see the value of being in Phoenix are willing to pay these prices,” says Wilson. “We’re no longer selling Phoenix as the low price option. Rather, we are selling the real estate product with its strong geographic location, access to transportation and desirable labor pool.

Rate increases are expected to level off slightly in the future, as land prices have stabilized. However, construction costs are still rising, so rental rates will continue escalating to some extent. The direct weighted average rental rate is $0.71 per square foot per month, compared to $0.65 in mid-year 2006.

“Our industrial market has reached a very healthy equilibrium,” says Wilson. “We have come out of a period of excess absorption and limited supply. We now have a large amount of supply coming into the market and continued strong demand. The real estate business is one of calculated risk, with the emphasis on risk. Those who’ve chosen this life understand the risks involved and recognize that bringing new product into a dynamic market can result in a huge hit, or an unanticipated, serious meltdown. Those developers who got their projects going early and are coming online this year will reap the rewards.”

Cushman & Wakefield is the world’s preeminent privately held real estate services firm. Founded in 1917, the firm has 195 offices in 55 countries around the globe, and 11,000+ talented professionals. Cushman & Wakefield delivers integrated solutions by actively advising, implementing and managing on behalf of landlords, tenants, and investors through every stage of the real estate process. These solutions include helping clients to buy, sell, finance, lease, and manage assets. C&W also provides valuation advice, strategic planning and research, portfolio analysis, and site selection and space location assistance, among many other advisory services. To find out more about Cushman & Wakefield, please call 1-800-376-3133, or visit the firm’s Web site at www.cushmanwakefield.com.

Contact: Robin Vitols (602) 957-8844

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