Phoenix’s Industrial Market Won’t Fall into a Supply Crisis

Industrial activity is growing nationally, with major markets reaping the benefits of ecommerce demand, and the Phoenix market is no exception. In Southern California, however, that growth has meant an increasingly tight supply and little to no availability of land to build new supply. Phoenix, however, has ample land for new construction and—at least for now—a constrained construction pipeline. As a result, the supply-demand dynamics in Phoenix are in a healthy balance, and it could mean an extended runway for industrial activity.

Some markets, like Tempe, are already built out, but the ample land in the surrounding markets have buffered Phoenix from a supply problem. “Phoenix does not have the same supply problem as Southern California,” Steve McKendry, a broker and member of the board of directors at Daum Commercial, tells GlobeSt.com. “We have a lot of industrial land that is available going west. There is a significant amount of land available for large block distribution buildings, which are used for ecommerce. We also have land that can be divided and used for building small user buildings.”

Industrial construction activity has been almost nonexistent in Phoenix until the last few years, as demand for industrial supply increased. As a result, the market has seen a mostly value-add industrial development rather than new construction. “New construction was at a standstill until three or four years ago because lease rates did not justify it,” McKendry says. “Investors both in the market and outside of the market are now coming in and buying older construction that can be improved. There are a lot of buildings being repositioned. Buildings with a functional structure that is inadequate for today’s users are being purchased and put back on the market for a higher price or a higher rent.”

Redevelopment of existing industrial product includes both single and multi-tenant buildings as well as industrial-to-office conversions. However, redevelopment opportunities are narrowing as well, thanks to increasing asset values. “Old buildings that can be purchased at a price that makes sense are getting harder to find, so investors have gotten to be picky,” adds McKendry.

The trend of industrial growth is expected to continue through the end of the year, including leasing and investment activity and new development. With unemployment down and GDP up, industrial should continue to be healthy both nationally and in Phoenix, according to McKendry. “Ecommerce sales have continued to rise, and in the last 12 months they have reached close to $500 billion. The absorption of the ecommerce base in the West Valley and throughout Phoenix will continue to be strong,” he explains. “The vacancy rate in Phoenix is at a record low of 6.7%, and the demand has continued to be greater than construction than inventory additions. As of this year, there has been 3 million square feet of industrial space added to the market, and 3.5 million has been absorbed. The inventory of industrial space in Phoenix is shrinking, and the continued demand from ecommerce will continue to put pressure on existing buildings and new constructions.”

There are some challenges on the horizon, however, that could deter industrial growth. Trade wars, rising interest rates and construction labor shortages are among those challenges. “Potential trade wars for construction materials and labor shortages are also going to push industrial prices up. I think those pressures are only going to increase and push prices higher,” says McKendry, who adds that interest rates, however, shouldn’t impact the market. “Demand is so strong that it can absorb the interest rate increase,” he says. “Demand and optimism is driving the market.”