Rents Will Eventually Moderate in Phoenix's Strong Industrial Market

Phoenix is seeing some of the biggest demand in the country when it comes to the industrial sector thanks to its prime location.

Net absorption in the second quarter reached 4.2 million square feet, according to a report from Transwestern. Not only has that number surged 59 percent year-over-year but it’s also up 32.8 percent from the decade quarterly average. Over the past 12 months, Phoenix has recorded a total of 16.1 million square feet. Transwestern calls the performance “one of the strongest industrial markets in the country.”

When it comes to submarkets, Pinal County led the way with a total of 1.06 million of net absorption for three months through June. Also, warehouse and distribution properties dominated the spaces of the leases, generating a total of 4.24 million square feet in the second quarter.

Overall, asking rents averaged $1.15 per square foot NNN, a 15.8 percent year-over-year jump, and a 78.5 percent rise from the pre-pandemic levels. The median for Class A rents was $1.33 per square foot NNN and Class B’s came out to 91 cents per square foot NNN. Scottsdale led the way with the highest asking rents in the second quarter, which averaged $1.46 per square foot NNN. However, that number is down 0.3 percent from levels a month ago.

Transwestern attributed the strong results in Phoenix’s industrial market to “its west coast location, ample highways, multiple airports, and proximity to Southern California.”

The largest deal completed in the second quarter involved Packaging Corporation of America, which bought a property at 10100 N 151st Ave in Waddel for $73.9 million.

That all comes as Phoenix recorded a high industrial vacancy rate. In the second quarter, it was 11.1 percent. That’s up more than double from 4.9 percent 12 months ago, and above the five-year average of 6.6 percent.

Plus, sales volume dipped to $756 million, which represents a 51.4 percent tumble from the second quarter of 2022 and down more than 11 percent from the typical quarterly average.

Phoenix has also been active with construction in the industrial space. In fact, it had a record of 61.6 million square foot completions in the past 12 months. Additionally, 31 million square feet is under construction, currently.

And because of the aggressive development in construction recently, Transwestern forecasts that the positive momentum in Phoenix won’t last long. It is forecasting that the activity will “disrupt market fundamentals.”

Particularly, “rent growth will continue to moderate throughout the year as the market absorbs the record supply pipeline,” Transwestern wrote.