Industrial Vacancies Surge in Phoenix as New Supply Floods Market

The exponential growth of industrial space in Greater Phoenix, which has crested in a tidal wave of more than 23M SF in new warehouse deliveries in the past six months, is beginning to overwhelm the still robust fundamentals of the market.

The overall industrial vacancy rate in Phoenix surged to 7.6% in the fourth quarter, while net absorption dipped to 2.4M SF, according to Transwestern’s latest market report.

The unfolding impact of this record-breaking surge in deliveries comes into focus when you compare these two data points to Q4 2022, when the vacancy rate stood at 4.7% and positive net absorption was nearly 7M SF.

We say the wave of new supply has crested because Q3 2023 marked the first decline in the amount of industrial space under construction in the Phoenix pipeline in 13 quarters, a trend that continued in Q4. But it’s not much of a dip: more than 44M SF in new supply is scheduled for delivery in the next 12-24 months.

If there’s going to be a reset in the Phoenix market, it will take some time to materialize because most of the projects in the industrial market are pre-leased, including all of the facilities being built in the most active submarkets of Glendale, Chandler/Loop 202 and West Valley, which together account for nearly half the pipeline.

“It might take a while for the market to catch and that will translate into some volatility for industrial fundamentals over coming quarters,” Transwestern’s report said. “However, despite the abundance of space becoming available and additional vacancy in the market, we anticipate leasing activity to remain solid.”

Volatility is beginning to rear its head in industrial rental rates in Phoenix, where overall asking rents ticked up to $12.94 NNN per square foot.

“Rental rates have been on a bit of a rollercoaster ride lately, going in opposite directions for the second quarter in a row. In two of the three areas where rates dropped, we’re expecting a quick bounce-back. In areas where rates went up, there’s a range,” the report said.

The “range” is substantial: The Mesa and Airport submarkets experienced modest rate increases of 3.2% and 1.3% in Q4, respectively, while the West Valley and Falcon Field submarkets saw huge increases of 59% and 36%, respectively.

“The submarkets with the highest rent rental growth are typically considered more budget-friendly and also have the largest number of construction projects in progress. As demand in those areas continues to grow, it’s only natural that rental rates would catch up,” the report said.

The industrial inventory in Phoenix has grown to nearly 419M SF, with nearly a third of the total located in the West Valley submarket, which includes Buckeye, Tolleson and Goodyear.