Q2 2022 Industrial Real Estate Report: Phoenix, AZ
Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.
The Phoenix, AZ industrial market signaled very healthy performance in Q2 2022 and continued its trend of outperforming previous quarters.
The market had an overall vacancy rate of 2.6% in Q2 2022, the lowest vacancy rate ever to be recorded in Phoenix’s industrial market.
The average rental rate rose to just about $0.80 per square foot, almost a 7% increase over Q1’s rate and about a 20% year-over-year increase driven by immense preleasing activity and rising tenant demand.
Our market forecast calls for further rent increases moving forward as demand continues to outpace supply growth on most fronts, including manufacturing and warehousing.
General Area Overview & Demographics
The population of Phoenix, Arizona has been steadily increasing since its 2010 population of about 1.5 million. As of 2020, its population was about 1.65 million.
As the metropolitan center for Arizona, Phoenix is experiencing rapid growth thanks to its economic diversification and the many companies that have relocated to it to take advantage of the business-friendly environment.
Major corporations such as Intel and Merrill Lynch have helped Phoenix attract a sizable amount of white-collar jobs to both the Phoenix and Mesa areas, which has also increased median income levels in recent years.
Phoenix’s infrastructure, however, was not built to support so many people, so traffic and ongoing congestion seem to be recurring issues.
How much did warehouse space cost in Phoenix in Q2 2022?
Warehouse space in Phoenix saw a nearly 7% increase in average rent per square foot from Q1 2022 to Q2. It now sits at about $0.80 per square foot.
The average price per square foot to purchase warehouse space in Phoenix, AZ was about $173 per square foot in Q2 2022.
Overview of Phoenix’s Q2 Industrial Market Activity
The second quarter of the year is traditionally a strong period for industrial leasing, and a mad rush of businesses, individuals, and investors to Phoenix is bringing with it historic industrial activity.
Despite economic uncertainties entering the investment arena, vacancy rates decreased for both gross leasable area and sublease space.
Average vacancy plummeted to 2.6%, the lowest ever recorded in the market. Industrial net absorption for Q2 2022 in Phoenix landed at just under 9 million square feet. Additionally, about 6.5 million square feet of new industrial space was delivered in Q2.
New industrial development activity increased by nearly 4% in Phoenix in Q2 2022, with approximately 35 million square feet underway.
The Pacing of Industrial Rents in Phoenix
Industrial rents in Phoenix have been riding a steady increase since 2015’s average of about $0.50 per square foot, but the last couple of years have seen the largest growth rates.
Industrial rental rates have increased by about 8% annually since 2019. In Q1 2022, they sat just under $0.70 per square foot.
In the short-term, rents are expected to continue increasing as more tenants compete for what’s already on the market as well as pre-lease what’s still under construction: Nearly every submarket of Phoenix experienced both a quarter-over-quarter and year-over-year increase in direct asking rents.
In the long-term, the outlook is a little less certain, but there are no significant indicators at this point in time pointing to harsh industrial market equalization in 2023.
Vacancy & Occupancy Rates
Industrial vacancies were the lowest they’ve ever been in Phoenix in Q2 2022, sitting at just about 2.6%.
Every submarket cluster, except Northeast Valley, saw a significant decline in industrial vacancies year-over-year: the average cumulative decline between the Southeast Valley, Airport Area, Greater Phoenix, Southwest Valley, and Northwest Valley submarkets was about 3%.
Vacancies are not expected to increase in coming quarters even as new industrial development delivers. This speculation is due to immense preleasing activity and prospective tenants rushing to claim under-construction spaces.
Average Phoenix, AZ Industrial Rents by Submarket
The Southwest submarket cluster of Phoenix saw the most affordable industrial rents in the area, while the Northeast submarket cluster saw the most expensive industrial rates.
- Average NNN rent per square foot in Airport submarket cluster: $0.95.
- Average NNN rent per square foot in Northeast submarket cluster: $1.20.
- Average NNN rent per square foot in Northwest submarket cluster: $0.74.
- Average NNN rent per square foot in Southeast submarket cluster: $0.84.
- Average NNN rent per square foot in Southwest submarket cluster: $0.57.
These submarkets also saw considerable year-over-year increases in average asking rents as well as quarterly increases.
Industrial Investment Activity in Phoenix in Q2 2022
Total volume of industrial sales in Phoenix, AZ grew exponentially in Q2 2022, both quarterly and annually.
The total quarterly increase in sales volume from Q1 to Q2 2022 was about 60%, totaling about $1.4 billion.
H1 2022 sales volume also outperformed H1 2021 sales volume by about 51%.
Likely the most notable sales transaction that took place in Phoenix’s industrial market in Q2 was the purchase of 10 West Commerce Park by Cohen Asset Management for about $125 million.
New Industrial Development Activity in Phoenix, AZ
About 35 million square feet of new industrial projects is currently underway in Phoenix, AZ’s industrial market.
This is about a 4% increase from Q1’s new construction numbers, continuing the trend of growing quarterly industrial development in Phoenix.
Takeaways for Industrial Real Estate Investors
The industrial real estate market in Phoenix is red-hot, driven by mass emigration to the area by both individuals and businesses alike.
While rising interest rates and long-term economic uncertainty plague the nation’s investors, that doesn’t seem to be the worry in Phoenix as new industrial development projects are started and investment sales continue to grow.
Do your research, stay diligent, and happy investing.
Methodology
All figures presented in this article are based on MyEListing.com’s commercial real estate listing data in corroboration with other freely available data and information covering the commercial real estate industry.
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