Coronavirus Pandemic Forecast to Create Surge in Demand for Warehouse/Distribution Space in Phoenix

April 27, 2020

The Greater Phoenix Industrial market could be poised for a surge in demand for warehouse/distribution space, according to a report released today by Colliers International in Arizona.  The “stay at home” orders resulting from the Coronavirus Pandemic have forced more people to shop online and those lasting habits will increase online retailer demand for distribution space in the city.

 

Year-end 2019 forecasts were very rosy for all sectors of the commercial real estate industry in Maricopa County.  The county added more than 89,000 new jobs during 2019, making it the #1 county in the nation for jobs added.  Unemployment was just 3.9%, 30 bps below the end of 2018.  February brought the first of two major events that changed the economy.  Crude oil conflicts significantly drove down the price of oil.  Normally a benefit to consumers, this event was followed by the Coronavirus event that put the brakes on oil usage by airlines and workers now bound to their homes.  During the week ending March 28, a noteworthy 88,940 unemployment claims were filed in Arizona, marking a 203% increase from the previous week.  That figure is increasing as the national shutdown progresses, creating uncertainty for companies as nearly all industries are forced to keep their doors closed.

 

During first quarter 2020, the Industrial investment sales market kicked off extremely strong with sales volume for the first two months surpassing all of first quarter 2019 by $339.6 million.  The quarter brought sales volume of $833 million, the third highest quarter since 2010.  The median price was $106 per square foot and cap rages compressed to end the first quarter at 7.04 percent.  The sizable sales volume was largely due to two bulk portfolio sales in February. Prologis acquired 603 buildings from Liberty Property Trust, 14 of which are located in Greater Phoenix.  BKM Capital Partners acquired 11 business parks in the Western US, which included 105 properties from Blackstone Group.  Thirty-nine of these are in Phoenix and account for $157.5 million of the sales volume.  91.46 percent of the sales volume was completed in January and February, highlighting the slowdown during March. 

 

Net absorption rose to more than one million square feet in first quarter, marking the fourth consecutive quarter of posting those levels.  Distribution buildings were the most popular, especially those in the Northwest and Southwest submarkets.  Late in the quarter, ABB Electrification signed the largest lease executed thus far in 2020.  The company committed to the entire 379,828-square-foot West 80 Industrial project in Tolleson.  Earlier in the quarter, ThyssenKrupp secured 370,000 square feet at 101 Distribution Center near Loop 101 and Northern Avenue in Glendale.  Finally, after being vacant for more than a year, Papago Distribution Center #3 attracted a single tenant, Hydro, to occupy its 221,116 square feet.

 

Vacancy rates remained low during first quarter, averaging 7.6 percent.  The trend of sub-10 percent vacancies began in third quarter of 2015 and has remained steady since that time. Vacancy has hovered in the low- to mid-seven percent range since 2017, which is a notable decline from double-digit vacancies posted as recently as 2015.  During first quarter, the vacancy rate rose 50 bps, which completed a 12-month increase of just 10 bps.  Manufacturing boasts the lowest vacancy by product type at just 3.3 percent.

 

Construction activity in the industrial sector reached a highpoint during first quarter of 14.3 million square feet.  This is the largest amount of new industrial space under construction ever in the Valley, following third quarter 2007 when 13.2 million square feet were underway.  Continued growth in the West Valley accounts for more than 80 percent of current construction. The Valley witnessed completion of 2.3 million square feet of new industrial space during the first three months of this year and 32 percent of that square footage is leased.  The remaining space is expected to be rented quickly in response to pent up demand.  The Southwest submarket cluster delivered more than 1.04 million square feet during first quarter and impressively only increased vacancy by 40 bps.  This is largely due to Ferrero Group, makers of Nutella and other chocolates, occupying all 643,798 square feet of distribution space in a recently completed building in Goodyear.  Inventory remains low in some key areas.  The combined Airport, Southeast and Northeast areas offer only 10 existing industrial buildings that can accommodate a tenant larger than 150,000 square feet.

 

Asking rental rates rose nearly 4.1 percent over the past 12 months and up 1.16 percent during first quarter.  Average asking rents settled at $0.58 per square foot at the end of March.  The Airport area posted the largest increases, which rose 3.8 percent over the quarter and 8.68 percent over the past 12 months.

 

The impact of the virus pandemic on the industrial real estate market remains largely unknown.  The potential closure of businesses combined with a handful of large projects slated to be completed in the next two quarters will increase vacancy later in 2020.  Small and mid-sized tenants will be affected more immediately by this crisis. The good news is that 64 percent of all inventory under construction is within projects exceeding 200,000 square feet, making these buildings appealing for ecommerce. Prior to the pandemic impacting Arizona, rental rates would have been predicted to increase.  This event will level rates, though likely not decrease them as landlords become more aggressive to get deals signed quickly. Construction hit its apex during first quarter and will surely slow down in upcoming quarters.

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