Industrial Real Estate Market In Phoenix Maintains Stability

21 Oct, 2008, Phoenix, AZ

The Metro Phoenix industrial real estate market has slowed in recent months, but it is still maintaining stability, according to statistics released today by Cushman & Wakefield of Arizona, Inc.

“Our market has shifted from 80 miles per hour to about 35, but we’re still leasing space,” says Mark Detmer, executive director with Cushman & Wakefield of Arizona, Inc. “Fortunately, we didn’t experience massive run-ups in industrial property values, so there’s not a big bubble to burst in our area.”

According to Detmer, there are still industrial real estate deals to be transacted in Phoenix. While there are deals in the marketplace, the city has posted year-to-date negative direct net absorption of (635,062) square feet. The third quarter 2007 direct net absorption was 3,627,308 square feet, which indicates a serious turning of market conditions. The third quarter was difficult for the market, evidenced by the fact that at the mid-year 2008 point the city’s direct net absorption was 496,647 square feet, indicating a three-month loss of more than 1 million square feet of direct absorption.

“The fact that we’re experiencing negative net absorption should come as no surprise,” says Detmer. “The national economy and our city’s housing struggles have led to many industrial users closing shop or holding back on possible leases. Demand is flat in our market, but this shouldn’t cause too much of a spike in vacancy. Our construction activity has been minimized, so we’re looking towards a time of slow activity and slow vacancy increases.”

The direct vacancy rate in metro Phoenix industrial space rose to 10.0 percent at the end of third quarter 2008, up from 8.8 percent at mid-year and 5.9 percent at the end of third quarter 2007.

That increase in vacancy is not severe, considering the fact that the market has added 10,311,804 square feet of new space in 2008. There are some projects still under construction, which will add another 3,994,519 square feet to the inventory. “The national credit market struggles have stopped any thought of new construction for the time being,” says Detmer. “The Southwest Phoenix submarket has been the hub of our construction and our absorption in recent years. It will continue to be the focus of activity as we ride out this economic storm.”

Despite a slowdown in leasing, metro Phoenix did post a few sizable industrial transactions during the third quarter of 2008. HD Supply, the warehousing entity for Home Depot, leased approximately 174,000 square feet in the Southwest Valley. Shutterfly leased 101,000 square feet at Liberty Cotton Center and T-Systems North America leased approximately 73,000 square feet at Cytec Technology Center in Tempe.

Also of note this past quarter was the first lease to be signed in the 550,000-square-foot 10 Chandler Park. Armor Works has leased approximately 63,000 square feet at this nine-building park as an expansion of its Chandler operations.

Direct vacancy rates are rising, but the market still has relatively healthy occupancy. Few submarkets have direct vacancy rates approaching 15 percent, with many still hovering below the 10 percent mark.

Rental rates are declining in the market, which is a sign of the supply and demand economics. “Landlords are competing for high quality tenants and willingly offer attractive concessions to seal a deal,” says Detmer. “Direct weighted average net rents are down to $0.68 from $0.73 just three months ago. Some of that shift is due to market conditions. However, we need to keep in mind that nearly all of our new construction is in the less expensive warehouse/distribution product category. As that product type represents a growing percentage of our overall inventory, it will serve to lower our average rental rates.”

According to Detmer, it is difficult to predict the future of Phoenix’ industrial real estate market in the uncertain times of the national economy. “If the credit markets loosen up and the stock market rebounds a bit, we are likely to experience a shallower decline in this real estate cycle. However, if the economy stabilizes at this recession point and doesn’t show signs of recovery, we will start feel a more dramatic downturn spike in the Phoenix industrial market.”

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Cushman & Wakefield is the world's largest privately-held commercial real estate services firm. Founded in 1917, it has 227 offices in 59 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.

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Please Note: Complete industrial market statistics are available through Robyn Vitols, Media Contact, at 602-957-8844.

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