Q1 2023 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.
In the Southwestern United States, Phoenix, the capital city of Arizona, stands as a vibrant metropolis. Its major industries include healthcare and biomedicine, education, advanced manufacturing, aerospace and defense, technology, tourism and hospitality, and financial services. The city's larger metropolitan area has grown by 1.4% to reach 4.7 million people so far in 2023.
In Q1 2023, Phoenix's industrial real estate market saw positive absorption, steadily low vacancy rates, and an increase in asking rents.
General Area Overview & Demographics
With a population of over 1.6 million residents as of 2023, Phoenix serves as the fifth-largest city in the nation and has become an economic and cultural powerhouse in the region. Phoenix boasts a scorching desert climate, with hot summers and mild winters, attracting sun-seeking visitors worldwide. The city spans approximately 517 square miles, encompassing diverse neighborhoods and a range of natural landscapes.
The Economy, Population, & Geographic Makeup of Phoenix
Renowned for its robust economy, Phoenix is a major hub for the healthcare, education, technology, and tourism sectors. The city's Gross Metropolitan Product (GMP) reached an impressive $252.1 billion in 2022, contributing significantly to the state's overall economic growth: Renters in the city have little trouble keeping up with payments.
The Greater Phoenix area hosts a range of exceptional educational institutions, including Arizona State University, one of the country's largest public universities. The city's dedication to education is further evident in its vast network of public and private schools, offering quality education to its diverse population.
The median age in Phoenix is approximately 33 years, indicating a relatively youthful population. The city has a significant proportion of young adults and working-age individuals, with the 25 to 44 age group comprising the largest segment.
The transportation infrastructure of Phoenix is well-developed, with a comprehensive freeway system and a major international airport, Phoenix Sky Harbor International Airport, facilitating seamless connectivity for residents and visitors alike.
Despite the urban setting, Phoenix offers ample opportunities for outdoor enthusiasts, thanks to its proximity to stunning natural wonders. The nearby Sonoran Desert, with its landscapes, and the iconic Camelback Mountain, which provides hiking trails and scenic views, attract many nature lovers.
Summary of Phoenix Industrial Space Performance in Q1 2023
Direct vacancies for Phoenix industrial real estate remained at 3.1% quarter-over-quarter. The Northwest market cluster had the highest vacancy at 5.0%, with the warehouse-distribution and office services building types recording vacancies of 5.5% and 5.1%, respectively.
The Southwest market cluster had the lowest vacancy rate at 1.9%, the only market cluster to go below 2%. The remaining market clusters had the following direct vacancy rates: Airport: 3.1%; Northeast: 2.4%; and Southeast: 3.1%.
While there was a decline from Q4 2022's absorption of 5.6 million square feet, Q1 2023 saw 4.8 million square feet absorbed, with warehouse-distribution accounting for 4.4 million. The Northwest market cluster alone experienced 2.5 million square feet of absorption.
What are industrial real estate rents like in Phoenix?
Average rents for Phoenix industrial real estate increased from $0.95 per square foot in Q4 2022 to $1.00 in Q1 2023, remaining above Q3 2022's numbers.
Phoenix's Northeast market cluster averaged the highest rent at $1.39, while the Northwest market cluster was the lowest at $0.80. Across all building types throughout the city, office services had the highest average rent at $1.28.
Purchase & Leasing Activity
At the end of Q1 2023, sales volume for Phoenix industrial real estate totaled around $480 million, marking one of the lowest quarters since 2020.
However, the average price per square foot increased by 11.3% from 2022 to reach $191. Cubeworks signed the largest lease of the quarter at 916,000 square feet.
Notable Industrial Real Estate Deals in Phoenix in Q1 2023
Several notable deals took place for Phoenix's industrial real estate in Q1 2023:
- Warner Commerce Center sold for $42.4 million, accounting for 197,000 square feet.
- Chandler Crossroads II sold for $40.15 million, accounting for 216,000 square feet.
- Sysco leased 354,000 square feet.
- PAC Worldwide leased 302,000 square feet.
These are select examples among other activities.
New Industrial Real Estate Development Activity in Phoenix in Q1 2023
About 4.5 million square feet of new industrial real estate became available in Phoenix in Q1 2023, all of which were warehouse-distribution.
The space under construction increased from 43.7 million square feet in Q4 2022 to 46.8 million square feet in Q1 2023.
Market Forecast for Phoenix's Industrial Real Estate Market
As interest rates rise and lending experiences a significant downturn, leasing will predominantly account for Phoenix's industrial real estate activity. Sales volume will likely decline in the second quarter but should recover throughout the remainder of the year.
Takeaways for Industrial Real Estate Investors
Phoenix continued to post strong performance for industrial space in Q1 2023. While interest rates continue to impact sales activity, healthy economic and market fundamentals will continue to drive leasing activity forward.
Do your research, stay diligent, and happy investing.
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