Phoenix Industrial Marked by High Absorption

PHOENIX-As one of the ground zeros of the subprime housing implosion, Phoenix commercial real estate has also struggled for the past handful of years. But one bright-spot sector in 2011 was industrial, and experts tell Globest.com that the sector will continue to shine in 2012.

Different reports put area-wide absorption for the year at between 4.5 million square feet and 6.3 million square feet.  The reasons behind the absorption boil down to lack of spec development and large players (like Amazon Inc., which took an additional 1.2 million square feet of space this past year following leasing millions in 2010) coming in and taking  huge chunks of space. In short, “the tenants have figured it out,” comments Chris McClurg, principal with Lee and Associates. “If you’re going to make a move, make it now.”

What impressed CBRE senior vice president Pat Feeney about 2011 was that a good chunk of the absorption – around 60% -- was represented by smaller users taking down 200,000 square feet and less, rather than the million-square-foot users.  “That’s a healthier number than what we saw in 2010,” Feeney remarks. “The base is broader and it involves all the submarkets.”

According to Zach Aulick, vice president research with Cassidy Turley BRE Commercial, the fundamentals driving those larger users include a close location to the ports of Los Angeles (a one-way drive is five hours). Then there are the economics of leasing in Phoenix.

“One surprise this year was Amazon taking down 1.6 million square feet,” Aulick says. “The reasoning behind that was because of Internet sales tax in California.” As Arizona doesn’t tax on Internet sales, “we’ll continue to see companies from California, and perhaps other states as well, coming to Arizona,” Aulick predicts.

Sales transactions of industrial product have been fairly strong during 2011, especially due to the fact that pricing is a lot more reasonable than it was a decade ago. “One barrier to entry in Phoenix between 2004 and 2008 was pricing,” McClurg comments. “If you wanted in, you’d have to pay an over-inflated price per pound.” But the buyers these days – mainly local and regional investors – are more realistic about property values because they’re more familiar with the market. As such, there is a better understanding about the price points that will appeal to sellers.

“The east coast REITS that were in our market got out,” McClurg says. “The ones who are left are the local ones who understand the value in Phoenix. They know that if they get the right building, put in some rehab and cosmetic upgrade, that the building has a good shot at getting leased.”

The experts predict that strong absorption, declining vacancies and rental increases will continue in 2012 with some of the smaller users “starting to come from out of their garages,” Aulick comments. Dwindling vacancy and continued positive absorption will likely lead to more building, though Aulick believes the majority coming out of the ground will be build-to-suit projects. 

Still, the market is slowly moving toward that tipping point in which spec development might make sense. Feeney explains that users coming to the market 24 months ago looking for 300,000 square feet had their pick of a lot of buildings. “Fast-forward to today, and one building is available,” Feeney says. “If you’re looking for 200,000 square feet, there are only two of those available.” Feeney says the market isn’t necessarily strong enough to justify a whole lot of spec development, but “we’re much closer than we were 18 months ago.”

McClurg is also cautiously optimistic. Though 2012 will not see enormous amounts of speculative space being announced, “if the right product comes out of the ground, there will be enough activity to absorb it,” he says.