Metro Phoenix Industrial Market Posts Negative Net Absorption for First Time in Recent History
12 Jan, 2009, Phoenix, AZ
During 2008, the Metro Phoenix industrial real estate market posted negative direct net absorption for the first time in recent history, according to a report released today by Cushman & Wakefield of Arizona, Inc.
“The Phoenix industrial market has been wound very tight for the past two years,” says Tom Johnston, senior managing director for Cushman & Wakefield of Arizona, Inc. “We have dealt with significant pent-up demand from tenants and a lack of industrial product to satisfy the business need. Developers finally were able to create new projects for this demand and we saw a huge surge of construction. Because we have historically built to yesterday’s news, we’re in need of continued activity to fill the space.”
The Metro Phoenix market posted negative direct net absorption of (1,405,420) square feet in 2008, compared to positive direct net absorption totaling 4,405,734 square feet in 2007. Hardest hit by the drop in net absorption were the areas of Black Canyon/Northwest Phoenix and Tempe. The workhorse submarket of Phoenix’ industrial market continues to be the Southwest Valley where the majority of the area’s warehouse/distribution space is found. That area posted positive direct net absorption for the year, but also has been the location of the most construction activity and highest vacancies.
Two of the city’s largest industrial transactions for 2008 were completed in this area. Amazon.com leased approximately 513,407 square feet in the Southwest Valley and HD Supply leased approximately 174,769 square feet at Buckeye Logistics Center.
In addition to the direct net absorption decreasing, Phoenix area vacancy rates are on the rise. Direct vacancy of industrial space rose to 10.6 percent at year-end 2008, compared to 6.0 percent at the end of 2007.
“The juxtaposition of absorption figures and vacancy rates illustrates how tight our industrial market has been in the past two years,” says Johnston. “Negative net absorption, such as we experienced last year, should have driven us to higher vacancies. Yet, we are just now reaching an equilibrium point. We had a significant shortage of space in the past and an incredible amount of tenant interest. Deliveries of new projects and a slight decrease in demand have released a good part of that pressure. Our industrial construction boom is nearly over, which will bode well for this product sector as the market rebounds.”
Vacancy rates have risen throughout the Valley during the past year. The lowest direct vacancy rate can be found in Tempe and Scottsdale/NE Phoenix, both with 6.9 percent. The highest direct vacancy is 11.8 percent in Southwest Phoenix.
During 2008, the Metro Phoenix industrial market added 11,566,834 new square feet to its inventory, nearly twice the construction completions of 2007 when 6,611,765 square feet were added. Currently only 2,716,082 square feet are under construction, which shows a dramatic decrease in building activity.
Looking ahead to 2009, the market will benefit from the completion of some sizable build-to-suit projects. Covance Laboratories will take occupancy of a Chandler facility that will be approximately 288,000 square feet. In addition, Dial Corporation’s new headquarters will be completed in North Scottsdale, adding approximately 350,000 square feet of occupancy to that market.
Direct weighted average net rental rates fell slightly in the final quarter of 2008 to $0.67 per square foot, down a penny from the end of September. These figures are down from $0.75 per square foot at the end of 2007. Much like other real estate sectors, the industrial market has now swung more in the favor of tenants. Landlords are now offering concession packages to strong credit tenants to attract leasing.
“The good news is that we’re not oversupplying our market with new space,” says Johnston. “We actually needed some downward pressure on over-inflated rental rates and a higher vacancy helps provide that. Fortunately, the industrial real estate market leaders responded quickly to changing economic conditions and have worked to stabilize the fluctuating market. We anticipate that the bottom of this downturn will be reached in six to nine months, which is not problematic. However, this is all contingent on the national economy stabilizing in upcoming months. If the overall economy destabilizes, we’ll see much more significant issues in our industrial real estate market.”
Cushman & Wakefield is the world's largest privately held commercial real estate services firm. Founded in 1917, it has 221 offices in 58 countries and more than 15,000 employees. The firm represents a diverse customer base ranging from small businesses to Fortune 500 companies. It offers a complete range of services within four primary disciplines: Transaction Services, including tenant and landlord representation in office, industrial and retail real estate; Capital Markets, including property sales, investment management, valuation services, investment banking, debt and equity financing; Client Solutions, including integrated real estate strategies for large corporations and property owners, and Consulting Services, including business and real estate consulting. A recognized leader in global real estate research, the firm publishes a broad array of proprietary reports available on its online Knowledge Center at www.cushmanwakefield.com.