Developers Eager To Build New Projects As Industrial Market Tightens

19 Oct, 2005, Phoenix, AZ

Developers of industrial space are rushing to construct new projects as the market tightens and demand continues at a record pace, according to Cushman & Wakefield of Arizona, Inc.

"2005 has been a huge year for industrial leasing," says Rob Stephens, senior director with Cushman & Wakefield of Arizona, Inc. "Our net absorption year-to-date is six times what we had leased at the same time last year."

Year-to-date net absorption in the industrial market totals 6,210,680 square feet. One year ago, the year-to-date absorption for 2004 was 1,214,093 square feet. Net absorption slowed in third quarter of this year, which is typical for the metro area. "We always see a dip in activity during third quarter as tenants are less anxious to lease during our warmest months and vacations affect activity," says Stephens.

The Far Southwest Valley has experienced the most significant net absorption this year with a total of 1,291,750 square feet absorbed. This area is a hub for large, warehouse/distribution buildings and is known for its convenience to California via Interstate 10.

Overall vacancy rates for industrial space have fallen slightly during the quarter from 6.8 percent to 6.3 percent valleywide. "Availability of space in our market is diminishing as only two submarkets have 10 percent or more of their space available." says Stephens. Several submarkets have overall vacancy rates below five percent, including West Phoenix, Far Southwest Phoenix, Mesa and Gilbert.

"Some areas are experiencing a shortage of space and are unable to satisfy the needs of tenants," says Stephens. "If your business requires 100,000 to 200,000 square feet of industrial space, several submarkets will be unable to accommodate your need."

In addition to leased space, the industrial market has experienced a lack of mid-sized buildings available for sale. "A large number of companies have chosen to purchase buildings for their industrial needs. There is strong demand for 30,000 - 50,000-square-foot industrial buildings for user purchase. Most of the existing facilities have already been purchased and there's demand for more. Sun State has created six free-standing build-to-suit facilities in the West Valley this past year and sold every one of them. Even the facilities they designed for speculative use have been converted to build-to-suits for owner/users."

The result of these two factors is a rush by developers to construct new projects. "Construction rates have increased because of concrete shortages and escalating steel costs," says Stephens. "However, developers are eager to get buildings underway so they can take advantage of the growing market demand."

So far this year, 1,031,296 square feet of new industrial space have been completed. Another 1,520,235 square feet are under construction. The majority of this space falls in the warehouse/distribution product category.

"Phoenix' industrial market is booming. Leasing is taking place in all product types and construction is taking place in a widespread variety of submarkets. The industrial market's recovery from the 9/11 slowdown was led by the leasing of warehouse/distribution space in the Far Southwest Phoenix area. Now we are experiencing strong leasing in high tech and manufacturing product, which is a true sign of economic rebound."

Rental rates have begun to rise as a result of diminishing space availability. "Landlord concessions to tenants have pretty much disappeared," says Stephens. "Rates for existing buildings are solidified and rising in a slow, steady fashion. Rental rates for new construction will be higher, due to the increased construction costs and perhaps higher land prices. However, landlords will always compete heavily for strong, creditworthy tenants."

The outlook for remaining months of 2005 is bright. "We anticipate a record-breaking year for net absorption and an overall vacancy in the five percent range at year-end. Each strong cycle of our industrial market makes us a larger player in the overall national marketplace, which bodes well for overall Phoenix economic stability."

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Cushman & Wakefield is the world's largest privately held real estate services firm. Founded in 1917, the firm has 189 offices in 57 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.

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