PHOENIX—The second quarter outlook for the Phoenix industrial sector is looking quite positive. GlobeSt.com caught up with Mike Parker, CBRE's first vice president, industrial services, to get his take on the numbers.

GlobeSt.com: What are some of the healthier industrial Valley submarkets and why?

Parker: The entire Metropolitan Phoenix industrial market saw 2.1 million square feet of positive net absorption in Q2 2014. Of that 2.1 million, 1 million square feet of net absorption occurred in the Southwest Valley and approximately 850,000 square feet of net absorption in the Southeast Valley. 

The Scottsdale submarket saw a 120 basis point decline in vacancy this quarter and the Southeast Valley saw a 50 point vacancy rate decline.

Small to medium-sized businesses were extremely active this past quarter, particularly in the under 50,000-square-foot size range. The economy is definitely improving and small- to medium-sized businesses are reaching a point where they can no longer do more with less creating the confidence to expand, relocate or purchase in order to satisfy their business growth and meet the demands of their customers.

GlobeSt.com: What trends are you seeing in industrial?

Parker: Look for a surge in industrial investment sales activity this year as some portfolios from some of the significant investors in the marketplace are anticipated to transact this year.

Decreasing vacancy rate and a lack of higher quality, functional facilities in the Southeast Valley/ Sky Harbor Airport Area has resulted in new speculative development by ING Clarion/Wentworth, Conor Commercial/Globe Corp, Eastgroup Properties, and Trammel Crow/Artis REIT to initiate projects at an opportune time to meet a surge in demand from users, particularly larger users in excess of 100,000 square feet.

The under 50,000 square feet freestanding building vacancy rate for the entire Phoenix market stands at only 5.42%. This is resulting in rising sale prices for building resales that are starting to reach within 15% to 20% of replacement cost and due to the dearth in supply more users are beginning to consider design-build facilities to satisfy their facility needs.

GlobeSt.com: How much value-add are you seeing in the industrial market?

Parker: The nature of value-add will switch from that of distressed or high vacancy properties as the majority of these have been absorbed due to a declining vacancy rate. A more traditional approach of value-add via rental rate growth when leases roll in a project or developing a project's excess land with new facilities will be more likely in the near future.

GlobeSt.com: What is your "state of the state" of industrial in the Valley?

Parker: Overall, there is less distressed real estate in the market. The overall vacancy rate is only 11.12% and with an obsolescence factor of say 3% to 4%, the real vacancy rate for functional buildings is probably in the 7% to 8% range which is why traditional development is being initiated in certain submarkets. Watch for a surge in industrial land sales over the next 18 months as developers seek out positions in the path of growth. Appraisal stress is currently occurring on some freestanding industrial deals as appraisers are reluctant to adjust their numbers to reflect the new economic reality of a constrained supply in certain property types versus solely relying on historical data.

GlobeSt.com: And where do you think we're headed?

Parker: We have witnessed 3 million square feet of completed new construction this year, 3.7 million square feet of positive absorption year-to-date and another 4.2 million is currently under construction.  This leads us to believe that we will continue to see a steady decline in the industrial vacancy rate for Metro Phoenix. Currently, demand is continuing to outstrip supply, so we anticipate higher rental rates, higher sale prices and increased land sales as the development cycle begins to satiate demand in a recovering economy.