Third Quarter Hammers Industrial Market

PHOENIX-The Valley’s industrial market, already in a fragile state before Sept. 11, was hammered through the rest of the third quarter, posting a negative net absorption of 713,000 sf. The glut pushed vacancy up 1 1/2 points to 8.7%, according to the Phoenix office of Grubb & Ellis.

“It’s ugly,” says Mike Haenel, a Grubb & Ellis industrial broker in Phoenix. “It’s brutal. It’s slow. There is very little tenant activity, no velocity at all. We are in for more of the same through the rest of the year.”

Four submarkets–Chandler, Mesa/Gilbert, Tempe and West Central Phoenix–all posted negative net absorption during the quarter. West Central Phoenix had 595,000 sf and Tempe, 568,000 sf.

The submarket struggling the most is the southwest Phoenix area. Even though the area had 487,000 sf of positive net absorption during the quarter, it’s still the red year-to-date, with 127,000 sf.

Red hot at the start of last year, the southwest Phoenix submarket is saddled with more than five million sf of vacant space and more is on the way. Nearly 2.5 million sf, most of it distribution and warehouse space, is under construction and will come onto the market in six months to a year. Developers kicked off project at the middle and end of 2000 when tenants were looking for large blocks and are now finishing construction at a time when tenants are as rare as a snowstorm in Phoenix.

“There is a three-to-five year supply out there,” Haenel tells GlobeSt.com. “Since Sept. 11 everything has basically been shut down. Tenants are telling us to call them at the end of the year or next year. It’s going to be slow for another six months until people figure out what is going on with the general economy.”

The strongest submarkets during the third quarter were Southwest Phoenix, 487,000 sf; Sky Harbor Airport, 234,000 sf; and Glendale, 257,000 sf. Those three and Sky Harbor Airport, by far the strongest, were the only submarkets to post net absorption.Haenel expects two industrial projects in the Sky Harbor Airport area–Kitchell’s Riverpoint project at 32nd Street and Interstate 10 and First Industrial’s project at 48th Street and the Red Mountain Freeway–will be the only ones to come out of the ground in the coming six months.

Most industrial activity is coming from tenants re-leasing space, Haenel says. Building owners are offering rent discounts of 5% to 10% and generous tenant improvement budgets. “Those landlords that have tenants that are getting ready to move are doing whatever they can to keep them,” Haenel says.

The fourth quarter won’t be any better than the third, even though historically it is the period during which much of the industrial activity generally occurs. “The market is pretty fragile,” Haenel says. “The market was slowing down, but the Sept. 11th events really threw us for a loop.”