Investors Get Creative to Play in Phoenix’s Industrial Market

Investors looking to break into Phoenix’s industrial market will need to get creative. The market has grown tremendously in the last 12 months, and it is attracting both private and institutional capital. The problem, however, is that few sellers are willing to part with their product when tenant demand and rental rates are reaching historic heights. As a result, investors are finding challenges placing capital in the market.

“There are not many investment deals on the market, and you are seeing a lot of investment deals trading before they go to market,” Chris Rogers, VP in DAUM Commercial’s Phoenix office, tells GlobeSt.com. “This is a new trend in the market. There are a lack of sellers, and owners that are looking to sell can’t find properties to trade into if they are interested in selling. So, you are seeing investors holding onto product.” The dearth of investment opportunities has been challenging not only for investors entering the market but for 1031 exchange buyers as well. For owners that are willing to sell, there are limited trade opportunities, and that has only exacerbated the supply issue.

The supply issue is an obstacle, but is can be overcome. Rogers recently completed two 1031 exchange deals in the tight Deer Valley submarket of Phoenix. Along with his colleague Trevor McKendry, Rogers brokered the sale-lease back of two adjacent industrial buildings on behalf of California-based investor Greenwood & McKenzie. To find properties for the client, the team strategically targeted local owner-users to see if they had interest in capitalizing on their real estate, securing a good return and then leasing back the asset at a reasonable rental rate. “We looked for owner-users that might be interested in getting a good price for their real estate,” says Rogers. “It is really about canvassing, and seeing who is willing to sell in this market.”

This is becoming a common situation in the Phoenix, and persuading an owner-user to sell has been the primary strategy of brokers. When they can persuade owners, there is a swift sale. “There are several 1031 exchange buyers in the market,” says Rogers. “If an owner-user is looking to sell now, we can secure an offer within the first 30 days, or less. For buyers, it is more difficult, and sellers with 1031 exchanges are going to need to be open given the lack of product right now.”

Deer Valley is a new industrial submarket in Phoenix, and the investment demand and explosion of growth is a perfect example of the activity rampant throughout Phoenix. Investors are arriving to find better quality product at higher cap rates than what you would find in other more mature West Coast industrial markets. “There is a ton of competition between buyers on product with a quality tenant in place,” Rogers adds. “We have seen a lot of California buyers coming here to buy product at 6% and 7% cap rates. The Deer Valley market is a newer market in Phoenix, and buyers from outside of the state are coming to buy newer buildings at a higher cap rate. In California, buildings would be 30 to 40 years old. Here, they get a quality building at a higher cap rate.”