Market Intel – Navigating the Industrial Frontier: Phoenix Market Fast Facts

SKIP AHEAD TO:

• What are some of the major drivers of industrial growth in the Phoenix market?
• What is the state of new construction underway in Phoenix in 2023?
• What is the state of the manufacturing sector in Phoenix and its impact on the industrial market?
• What are some areas to pay attention to in regards to the future of industrial CRE in Phoenix and nationwide?
• What are some areas to pay attention to in regards to the future of industrial CRE in Phoenix and nationwide?

Phoenix has emerged as one of the strongest growth markets for the industrial sector over the last few years. Overall, what factors are fueling its growth and what are the major market trends? CompStak and NAI Global completed a joint webinar recently and dug into the trends and market stats. 

Here are some of the highlights:

• Connectivity to California and Mexico is a boon for Phoenix industrial market;
• Phoenix has established itself as a prominent manufacturing hub, with its metropolitan area surpassing the entire state of California in terms of the number of manufacturing jobs added since February 2020;
• Starting rents for Phoenix industrial transactions closed in 2023 to date have grown by more than 44% since 2019 but year over year rent growth is decelerating, mirroring nationwide trends.

Read on for more! 

This blog was completed by a partnership between CompStak and NAI Global. CompStak and NAI Global recently hosted a joint webinar covering trends in the greater Southwest U.S. including the markets of Phoenix, Las Vegas and San Diego. The following blog covers Phoenix trends but for a full overview of SW Industrial Trends, watch the webinar in full here. 

What are some of the major drivers of industrial growth in the Phoenix market?

1. 1. Population Growth Driven By Housing Affordability and Pandemic Migration  According to the latest U.S. census data, Phoenix’s metro area grew by 5.4% from 2017 to 2022, outpacing growth in the U.S. overall over the same period (+2.5%). Furthermore, population growth is anticipated to grow by more than 2.0% annually for the next five years in the Phoenix area, according to ESRI’s analytics. Phoenix’s population boom can be partially attributed to its housing affordability relative to the rest of the nation. According to ESRI, the median home value in Phoenix stands at $382,000, which is notably lower than the median value of $451,000 for the rest of the Southwest ,including California, Colorado, Utah, Nevada, and New Mexico.

2. 2. Connectivity to California and Mexico is a Boon for Phoenix Industrial Market

Arizona borders two of the world’s largest economies by Gross Domestic Product (GDP), which include California and Mexico.  With nearshoring in Mexico gaining momentum, its proximity is expected to be an ongoing tailwind for the Phoenix market—Nogales, Mexico is less than three hours from Phoenix. Furthermore, Phoenix’s advantageous location offers a direct five-hour drive to the Port of Los Angeles via Interstate 10 and connectivity to San Diego through Interstate 8.

3. 3. E-Commerce Remains Elevated and Growing Nationally

A rise in e-commerce demand drove growth in the industrial sector nationwide. Notably, recent data shows that e-commerce is increasing again—its share of total retail sales has ticked up for the past two consecutive quarters (Q1 and Q2 2023) according to the latest from the U.S. census.  In addition, Arizona’s recent retail sales growth has outpaced the U.S. overall. According to May 2023 data from the US census, retail sales were up 2.8% year over year in Arizona, as compared to a 0.9% growth rate over the same period in the U.S. overall.

Phoenix’s industrial market has experienced significant growth, partly due to its status as a lower-cost alternative. This is especially notable as pricing in industrial markets in neighboring states, such as California, has reached unprecedented levels. How has rent growth trended over the last few years and is still growing in 2023?

1. 1. Starting rents for closed transactions overall have grown by more than 44% since 2019 to 2023 to date according to CompStak’s data. 

Although initial rents have seen a substantial increase since 2019, year-over-year rent growth is gradually stabilizing, mirroring the trend observed in various markets across the country. In 2023, year-over-year rent growth stands at 12.2%, which marks a notable decline from the 21.1% growth experienced in 2022 compared to the preceding year, 2021.

2. 2. According to CompStak’s data, the average effective rent (which factors in annual lease escalations and/or landlord concessions) for transactions of 100,000 square feet or larger completed in Phoenix has witnessed an impressive 78.3% surge since 2019. However, it is important to note that the average annual cost for transactions of 100,000 square feet or more in the Los Angeles-Inland Empire region still exceeds that of Phoenix by more than 2.1 times.
3. 3. Due to this robust period of rent growth, rents in place for industrial tenants with active leases today are still well below the average starting rents for transactions completed over the last 12 months in CompStak’s data. In Phoenix, this spread averages more than 23%, signifying that landlords with near-term lease roll could still capture new tenants at significantly higher rents even if rent growth and demand slow further. 

What is the state of new construction underway in Phoenix in 2023?

1. 1. Phoenix is a nationwide leader in space under construction.
2. Year to date, the Phoenix metro region has an estimated 49 million square feet of industrial space under construction which is roughly 12% of the market’s existing inventory, according to JLL’s most recent report. Phoenix has the second highest total construction pipeline nationwide, falling just behind the Dallas-Fort Worth, according to NAI Global and CommercialEdge. 
3. 2. The 303 Corridor or Loop 303 on the west side of Phoenix is a hub of major projects and new construction. Significant employers along State Route 303 include Amazon, FedEx, REI, Wal-Mart, Boeing, & Pepsi to the south and TSMC (Taiwan Semiconductor Manufacturing Company) in the northern part of the corridor.  Major projects under construction include the next two phases of Lincoln Property Company’s Park 303 and Airpark Logistics Center, a multi-phased 2.7-million-square foot development set to encompass five total buildings.

Phoenix is one of the nation’s strongest, emerging manufacturing hubs.

What is the state of the manufacturing sector in Phoenix and its impact on the industrial market?

1. 1. Since February 2020, the Phoenix metro has expanded manufacturing employment by 9.7%, adding 13,000 jobs, outpacing the rate of change in the U.S. overall (+2.5%), according to July 2023 BLS data. Notably, Phoenix’s metro added more jobs than in the entire state of California. Overall, the state of Arizona ranks 7th in the nation for absolute growth in manufacturing employment from February 2020 to July 2023, according to the most recent data from the BLS. 
2. 2. Among the top 20 deals by total value completed since 2022, the manufacturing sector accounted for the second largest share measured by total value. These deals included transactions completed by Corning, JA Solar, Virgin Galactic, Unical Aviation, and Axon Enterprise. Several of these top manufacturing deals were located in the 303 Corridor including the deals from JA Solar, Unical Aviation and Axon Enterprise.
3. 3. Currently, Boeing and NXP Semiconductors are the top two biggest manufacturing occupiers in Arizona. Overall, Arizona’s manufacturing sector is considered a leader in semiconductor design, development, and production. 

The industrial sector is expected to remain robust, but slow its pace of growth through the end of 2023 and possibly through 2024.

What are some areas to pay attention to in regards to the future of industrial CRE in Phoenix and nationwide?

1. 1. Both Mexico and Arizona stand to benefit greatly from nearshoring. The bordering ports of entry are critical for cross-border trade and “just-in-time” supply chain manufacturing. This helps reduce the need for large stores of inventory on hand, thereby reducing storage costs for occupiers. International port crossings are within a three-hour drive of Phoenix and are also conveniently located in close proximity to neighboring Southwestern states.
2. 2. The spike in interest rates starting in March 2022 has negatively impacted the pipeline for new construction. Securing funding for new projects has become increasingly challenging, primarily due to elevated financing costs. Moreover, the expenses related to materials and labor remain high, even though there has been some recent moderation in inflation. In addition, lenders focusing on asset management are reassessing contracts and project profitability. 
3. 3. Multistory industrial development is a trend to watch nationwide. The past few years have seen an upswing in multistory industrial development underway, but such development is expensive and is primarily justified in markets commanding double digit rents. There are still only a few markets where the combination of land constraints, strong demand, and double-digit rents justifies vertical construction over horizontal expansion. Currently, New York City  is the multistory hub with more than 7.3 million square feet under construction. However, it continues to be a trend that merits close monitoring, especially as technological innovation in the logistics and manufacturing sectors continues to advance and evolve.

Thank you NAI Global for hosting this webinar and their collaboration on this blog. 

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