Fervent Investor Demand for Phoenix Industrial Properties Fuels Record Prices, Sales Volume in 2018

Article originally posted on CoStar on January 9, 2019

CoStar Market Insights: Sales Volume Exceeded $2 Billion in 2018 Even as Industrial Prices Surpassed Pre-recession Levels

A flex building at 615 N. 48th St. in Phoenix that was purchased as part of a portfolio in January 2018 for $218 per square foot, which reflects the jump in pricing in the metropolitan area. Photo: CoStar
A flex building at 615 N. 48th St. in Phoenix that was purchased as part of a portfolio in January 2018 for $218 per square foot, which reflects the jump in pricing in the metropolitan area. Photo: CoStar

In 2018, Phoenix’s fast-growing population, low cost of doing business and proximity to California and Mexico generated plenty of investor interest in warehouse and industrial facilities as nearly $2.2 billion in property traded hands, an all-time high for the market and an increase of approximately 65 percent from 2017.

The volume of square footage that traded also rose substantially from 5.6 percent in 2017 to more than 7.7 percent in 2018. As a result, the amount of square feet that sold avoided slowing for the third consecutive year.

The bull market for industrial property also resulted in record high prices. On average, Phoenix industrial properties sold for more than $97 per square foot in 2018, breaking the pre-recession peak of roughly $95.66 per square foot set in 2007. Year-over-year, prices have surged by nearly 15 percent, contributing to the compression of capitalization rates by an average of around 500 basis points.

Within the far-ranging industrial property sector, flex buildings saw the biggest jump in pricing, while data centers fetched the highest overall prices. The average price per square foot paid by investors for Phoenix flex buildings increased by about 32 percent in 2018. The January 2018 acquisition of a two-building data center portfolio totaling 652,856 square feet by Iron Mountain and I/O Data Centers sold for a price $142.5 million, or about $218 per square foot.

More than $1.4 billion of distribution and warehouse buildings also traded hands last year, and the average price per square foot has climbed by more than 13 percent from 2017.

Buildings with e-commerce tenants were involved in some of the year’s biggest trades. In September 2018, Boston-based CrossHarbor Capital Partners acquired the 1 million-square-foot Buckeye Logistics Center occupied by Amazon for $98.3 million, or approximately $97 per square foot.

The manufacturing sector also was a standout for job growth in Phoenix in 2018. Demand for this type of specialized industrial space from manufacturers is considerably outpacing new construction, causing vacancies to drop below 3 percent.

Although the specialized manufacturing sector had the lowest percentage increase among the three industrial property sub-types, property sales still rose by nearly 20 percent. The largest deal was Alaska-based Bond Filipenko’s acquisition of Southwest Products’ 167,291-square-foot manufacturing facility in May 2018 for $15 million, or about $90 per square foot.

Investors chasing yield late in this real estate cycle are taking plenty of looks at Phoenix. Despite rapid price appreciation, capitalization rates are still hovering near 6.8 percent. Property prices may continue to rise substantially in 2019 if the economic and demographic outlook for Phoenix remains relatively unchanged.

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