Metro Phoenix Industrial Market Still Active In Slowing Real Estate Economy

2 Apr, 2008, Phoenix, AZ

The Metro Phoenix industrial market remains very active with tenant interest despite the slowing real estate economy, according to Cushman & Wakefield of Arizona, Inc.

“We posted negative net absorption during the first quarter, but industrial leasing agents remain busy with an abundance of tenant requirements,” says Mark Detmer, executive director with Cushman & Wakefield and NAIOP Industrial Broker of the Year for 2007. “It is taking longer for tenants to make decisions and commit to leases, because of caution in the economy, but the activity for new requirements has increased.”

During the first quarter of 2008, the industrial market posted a negative net absorption of 234,576 square feet. The only major areas to see positive net absorption last quarter were the popular Southwest Valley, known for its warehouse/distribution space, and the Southeast Valley.

“The negative net absorption of first quarter is really an indicator of leasing activity at the end of last year,” says Detmer. “It takes several months to complete lease negotiations, so the actual posting of leases in first quarter are a reflection of tenant interest in the previous year. We’ve seen significant tenant interest during first quarter, so we anticipate those second quarter net absorption figures to be positive. A couple of large warehouse transactions in the Southwest Valley could put us back in the positive zone very quickly. However, our projections indicate that net absorption for 2008 will remain relatively flat.”

The Southwest Valley posted positive net absorption of 378,887 square feet during first quarter. Southeast Valley had 34,227 square feet of positive net absorption.

Meanwhile, both the Black Canyon/Northwest Phoenix area and the Sky Harbor/Central Phoenix areas posted negative net absorption in excess of 250,000 square feet.

“We’re just now starting to feel the impact of housing industry decline,” says Detmer. “While homebuilders and lenders traditionally occupy office space, the homebuilding suppliers are industrial tenants. These suppliers are feeling pressure to downsize and are beginning to return space to the market.”

The direct vacancy rate for industrial space in Metro Phoenix rose last quarter from 6.0 percent at year-end 2007 to 7.5 percent at the end of March. This is largely attributed to the completion of approximately 4,139,275 square feet of new industrial space. Another 5,859,022 square feet are currently under construction valley-wide and will also impact the industrial vacancy rate this year.

“We remain at a very healthy equilibrium in the industrial market, but new construction is expected to raise the vacancy factor approximately two percentage points by year-end 2008,” says Detmer. “We will continue to see new construction starts in the industrial sector, but at a much diminished pace from last year. Developers and lenders will be very careful to only start projects for which there is proven demand.”

The largest leases signed during the first three months of 2008 include U.S. Air Conditioning’s lease of 108,000 square feet at 1850 E. Watkins. RedFlex Traffic Systems leased approximately 76,625 square feet at Pinnacle Commerce Center and Armor Designs leased approximately 71,000 square feet at 4645 S. 35^th St.

Rental rates in the industrial market are experiencing some downward pressure. The direct weighted average rental rate fell during first quarter 2008 from $0.75 per square foot to $0.70. “Two factors created this drop in rates,” says Detmer. “A huge percentage of our new space coming on line is large format, warehouse/distribution space. Since this space is the least expensive of the industrial product types, it serves to drive down the overall average price of industrial space. Another big factor is the simple economics of supply and demand. We have more supply in the market with these new completions and demand has slowed from last year. Those elements will always create downward price pressure.”

In addition to rental rates dropping, the market has experienced noteworthy decreases in industrial land prices. “Land prices have remained firm for in-fill parcels with unique features, but overall they have dropped,” says Detmer. “This creates opportunity for land acquisition and development that will translate into lower priced projects.”

The sale of industrial properties has slowed. The top industrial sales in first quarter were all completed by Cushman & Wakefield. “The investors who completed large transactions in first quarter wisely purchased shell buildings that are ready to lease without having to navigate entitlement risks and construction cost escalations,” says Detmer. “People are still looking for low-finished distribution/warehouse building opportunities because they are stable. The debt market has tightened and capitalization rates are rising, making investment opportunities more limited. The gap between a seller’s price and what buyers are willing to pay has widened. We see fewer buyers make offers and so we’ll see fewer completed sale transactions in 2008.”

The industrial market is expected to remain somewhat flat for the year 2008. Tenants are still actively pursuing space in the market, though not at the pace seen in the past two years. Construction activity will slow to accommodate decreased demand. “This is a cyclical business and the developers are playing this carefully,” says Detmer. “As the city has grown, we have developed a larger foundation of industrial space which creates a good deal of stability. As a result, the peaks and valleys of our real estate cycle are not nearly as dramatic.”

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.

Contact: Robin Vitols (602) 957-8844

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