“We always find a period of overbuilding here, and I don't think we did anything different during the last cycle,” Danis says. “But, we've shut the valve for new construction, which is helping absorption and occupancy.” In fact, less than 400,000 square feet of new industrial space is currently under development.

The report says asking rental rates will continue to soften, but at a slower pace, falling to their lowest level within the next year. In fact, asking rental rates have declined to 2004 levels, allowing tenants who are renewing or expanding to dramatically reduce their occupancy costs. On average, asking rents are $4.32 per square foot for distribution space. Flex/R&D asking rents are just over $11 per square foot.

Danis notes the Valley industrial market competes primarily with Southern California big industrial inventory. “We’ve always been a low cost alternative to Southern California, and during the most recent cycle, we got a little too big for our britches for our price point,” he says. “We got expensive really fast. Now that we’ve returned to a reasonable pricing level, we should continue to attract business away from California.”

Looking forward, the firm forecasts that absorption will be positive both this year and 2011. The report indicates that vacancy rates should peak this year and then begin to stabilize and slowly decline as construction of new speculative buildings has stopped in metro Phoenix

“I wouldn’t say business are in a ‘gung-ho’ expansion mode, but they are making some strategic moves and it’s an obvious time to make decisions to reduce expenses,” Danis says. “It will be interesting to see what the third quarter holds for us.”