Analysts point to two primary sources for interest in the market. First, the Census Bureau's most recent figures rank Phoenix as the third fastest growing major metropolitan area in the country, adding more than 130,000 people in the last 12 months. Second, proximity to Southern California makes the region an attractive alternative to the coastal state's increasingly congested and expensive markets.
Jay Ellingson, executive vice president of SunCor Development Co., calls Southern California proximity the major impetus for the Tempe, AZ company's development of Palm Valley 303, a 1,600-acre, 19.6 million-sf business park in the Phoenix suburb of Goodyear. The project launched in April with the construction start of a 440,000-sf, speculative cross-dock distribution facility. "Tenants will be able to bring containers direct from the ports of Long Beach and Los Angeles for break-down, assembly and distribution," he explains. "Even though there are added transportation costs, rents are significantly lower than the Inland Empire."
Not surprisingly, California companies are among the largest investors in the growing market. Irvine, CA-based LBA Realty Inc., which owns some two dozen Arizona industrial and office properties, made the year's largest purchase with the $73 million acquisition of McShane Westside Business Park, a 1.1 million-sf property in Tolleson, AZ. Smaller California firms have also targeted the region. San Mateo, CA-based GW Williams Co. recently paid $8.1 million for Airport Plaza, an 84,118-sf industrial project in Phoenix that is 86% occupied. The acquisition is the company's fourth in the market, and Steven Lindley, a senior vice president with Grubb & Ellis/BRE Commercial in Phoenix who co-brokered the deal, tells GlobeSt.com the buyer is looking for additional area investment opportunities. California buyers are equally active at the market's lower rungs. According to Grubb & Ellis/BRE, private California investor Jeff Lion purchased a vacant 17,200-sf industrial building in Tempe for $1.45 million and Los Angeles-based Maximum Management Corp. bought a 20,400-sf industrial building in Phoenix for $1.26 million.
But other players are active too. New York City-based ING Clarion recently picked up the 669,266-sf Durango Commerce Center in Phoenix for $43.55 million and Chicago's First Industrial Realty Trust paid $25 million for the 228,277-sf Arrowhead 101 Business Park in Peoria, AZ. The former transaction reveals ING's faith in the market, as the recently completed project, built on spec by Panattoni Development Co. of Sacramento, CA, had no tenants at the time of sale. Austin-based Capital Commercial Investments Inc. also evidenced faith in the market, returning to Phoenix for the first time in several years with the $7.1 million acquisition of a 129,187-sf flex/R&D building in Chandler, AZ. Rob Evans, the privately-held company's director of operations, says Capital Commercial wants to have 1 million sf to 1.5 million sf in the area in the next 18 to 36 months.
While investor interest holds strong and long-term prospects appear solid, market fundamentals have been suffering. The Q1 report from Colliers International shows negative absorption of 312,299 sf, which the brokerage attributes primarily to delivery of 6.2 million sf of new product, compared to 2.2 million sf in Q4 2007. While new construction was down sharply to 1.98 million sf, Colliers notes that an astounding 18.5 million sf of projects have been proposed, double the number in the same quarter a year ago. Overall vacancies moved to 11.7% from 10.1% a year ago, and the brokerage predicts vacancies will continue to rise as absorption rates move further downward. At the same time, monthly rent has held steady for four quarters at $0.76 a sf, up from $0.70 a sf in Q1 '07.
Steven Gragg, managing director and regional partner for the Phoenix office of Cushman & Wakefield, acknowledges the market got off to a slow start this year, but he says the cooling down hasn't dampened enthusiasm among either investors or developers. In his view, the current vacancy level is ideal. "The region is still a premiere economic alternative for companies looking to expand in the Southwest," he maintains. What's more, he adds, historically, recessionary periods have not not been as long lasting in Phoenix as in other markets. "The region will continue to benefit from its growing base and its status as a top economically priced market," he concludes.
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