Greater Phoenix

Greater Phoenix
Industrial Market Report | Third Quarter 2010
Industrial Report - 3rd Quarter 2010
The Greater Phoenix industrial market continues to gain ground even as overall industrial output remains
sluggish. The Valley economy remains fragile but resilient as low manufacturing orders, corporate downsizing
and an uncertain job market have all conspired to suppress real growth. However, there are bright spots in
the industrial sector that could foretell gains in the coming months.
The industrial sector posted over 2 million square feet of positive absorption for the third quarter, albeit one
building is responsible for over half that number. Still, with last quarter’s nearly as strong numbers, 2010
absorption is a respectable 3.2 million square feet. This is in stark contrast to the nearly 5 million square feet
of negative absorption in 2009. Deals that were once elusive are now getting signed notwithstanding greater
scrutiny on both sides. Consequently, total vacancy is down for the third consecutive quarter to 15.3%.
Though historically very high, this three month trend reverses ten quarters of rising vacancies. As expected,
warehouse space is where the bulk of transaction activity has occurred.
Construction has slowed to a trickle as existing inventories benefit from the slowdown in building. As recently
as third quarter 2007, construction activity peaked at over 13 million square feet. Since then, 22 million
square feet of industrial inventory has been delivered in the Valley. During the market’s last rise, expectations were that Arizona’s economic boom and abundant lending would keep the momentum moving forward
indefinitely. That thinking led to the current oversupply the sector faces today and will require many more
strong quarters of strong absorption to make a dent in vacancy numbers.
3Q 2010
Compared to
2Q 2010
Vacancy Rate
Net Absorption
Construction
A lone 105,292 square foot manufacturing facility was delivered in the third quarter. This figure represents the
low point of industrial deliveries in the Valley going back to the 1990s. As recently as third quarter 2007, there
was over 13 million square feet of industrial buildings under construction. This quarter there was none. The
brakes were put on in mid-2008 on new projects and have dwindled ever since. New construction should be
near zero through much of 2011.
Overall rental rates posted a total average yearly rate of $6.36, triple net. Rental rates are still experiencing a
12 month-running continuous slide. Tenant expectations coupled with excess inventory have created a perfect storm to lock in long term lease deals at historic low rates. This is to be expected during these economic
times, however it will not persist for long when market sector velocity begins to improve.
Asking Rents
In the largest lease transaction of the third quarter, Amazon took a massive 1.2 million square feet of distribution
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tel 602 955 4000
2944 North 44th Street Suite 200
Phoenix AZ 85018
www.naihorizon.com
space at 4750-5050 W. Mohave Street in Phoenix. Price per square foot was listed at $4.44 per square foot. This makes
the third distribution center Amazon has secured in the Valley. In the top sales transaction for the quarter, Cole Real Estate
Investments purchased the 466,694 square foot, Home Depot distribution building from USAA Real Estate for $30.4 million. Price per square foot is calculated at $65.24.
The Valley’s industrial sector slowly begins its rebound with a fresh perspective, reasoned expectations and a return to
market fundamentals that should be the foundation for future growth and market vitality.
For more comprehensive market information, please visit with an NAI Advisor.
Economic Outlook
Most economic experts would agree that the ‘Great Recession’ is technically over and that the worst may be behind us.
Even so, the U.S. recovery is moving at a painfully slow pace. Consumer spending and business investment remains suppressed due to the lack of confidence in the dismal job market. Many consumers are committed to saving what they have
which further stymies economic growth. Commercial real estate, which continues to struggle in several sectors due to
overbuilding and the lack of demand, still has a way to go before more reasonable conditions take hold. Even with these
dire conditions, there are bright spots and a growing consensus that the coming quarters could bring much needed positive activity.
Real estate investors have returned to the market interested in premium properties that are priced aggressively. These investors understand that entering the market before velocity resumes secures future earnings. Their reentry into the market
reflects growing optimism that has been building over the past few quarters. The multifamily sector is leading the charge
back as REITs and other investment groups who have been sitting on piles of cash are eager to invest in quality assets.
Landlords are still caught between a rock and hard place when trying to retain quality tenants. They realize they are in a
renters market and must provide concessions, but the days of unheard of terms may be coming to end. Market conditions
have begun to stabilize and with the expenses associated with moving, it may leave tenants where they are and landlords
breathing a sigh of relief.
Arizona’s economy was hit harder than most other states due to the collapse of the housing bubble. This downturn set off
a domino affect across the entire economic landscape from employment, retail, construction, manufacturing and tourism. Although most indicators are down, the basic fundamentals that bring people, companies and investment to Arizona,
remains unchanged. The low cost of housing, weather and entrepreneurial spirit continue to make Arizona an attractive
place to be. Once the gears start turning across the country, many will again focus on the place they had their sights set
on in the first place – Arizona.
Unemployment Rate
Phoenix Industrial Market Report | First Quarter 2010
Greater Phoenix
Industrial Market Report | Third Quarter 2010
Includes multi-tenant, single tenant and owner occupied industrial inventory.
Historical Industrial Vacancy Rate
Historical Average Quoted Industrial Rental Rates
Greater Phoenix Industrial
Submarket Map
Some of the information contained herein has been obtained from third party sources deemed reliable, but it has not been independently verified NAI Horizon.
NAI Horizon makes no warranties or representations as to the completeness or accuracy thereof. NAI Horizon makes no guarantee about projections, opinions,
assumptions or estimates.
NAI Horizon | 2944 N 44th St Suite 200 | Phoenix AZ 85018
602 955 4000 | www.naihorizon.com
NAI Horizon Industrial Specialists
Jeff Adams
Senior Vice President
[email protected]
Rick Foss
Vice President
[email protected]
John Filli, SIOR
Senior Vice President
[email protected]
Chad Neppl
Vice President
[email protected]
Jeff Hays
Senior Vice President
[email protected]
Patrick Sheehan
Vice President
[email protected]
Mark Phillips, SIOR
Senior Vice President
[email protected]
Joe Cryan
Senior Associate
[email protected]
Isy Sonabend
Senior Vice President
[email protected]
Matt McDougall
Senior Associate
[email protected]
Mark Wilcke
Senior Vice President
[email protected]
Peter Batschelet
Associate
[email protected]
Tom Young, SIOR
Senior Vice President
[email protected]
Tysen Manuel
Associate
[email protected]
NAI Horizon Investment Specialists
Report prepared by:
Bobby Bull
Senior Vice President
[email protected]
Barbara Lloyd
Senior Vice President
[email protected]
Matt DePinto
Research Manager
[email protected]
Barry Lammersen
Senior Vice President
[email protected]
Ed Toschik
Senior Associate
[email protected]