How Silicon Desert is powering Phoenix industrial surge Article originally posted on AZ Big Media on May 15, 2026 Greater Phoenix’s industrial sector has reigned as the king of commercial real estate throughout the first half of this decade. The region’s rising reputation as the epicenter of U.S. manufacturing’s revival has brought the Valley global attention, with companies of all sizes considering whether to join the growing ecosystem. As the “Silicon Desert” continues to establish itself, the industrial market has responded to the surge of both supply and demand across multiple product types — but it could be approaching a new equilibrium. Here’s why last year’s performance defied predictions, what activity has occurred in the opening months of 2026 and how tenant needs are changing. “2025 felt like the year we started stabilizing,” explains Cooper Fratt, executive vice president at CBRE. “The vacancy rate in Q1 of 2025 was 12.2%, but through the rest of the year we were able to push it down 120 basis points to 11%. It’s still not what we’d consider a truly stable market, but we’re finally heading in the right direction.” TSMC’s initial announcement in 2020 and the expansion of e-commerce in response to the pandemic drove considerable interest in the Valley. This surge of demand quickly outstripped supply, and the vacancy rate tumbled to the 3%-4% range. Developers took notice and responded with a flurry of new projects, bending the trend line upward until reaching its peak. According to Fratt, the beginning of 2025 was expected to be the high-water mark for vacancies as the final wave of projects from the spec industrial boom was delivered — a period that brought a massive amount of space to market. “If you add up all the construction starts from 2021, 2022 and 2023, we had 100 million square feet of new development,” Fratt says. “That’s a little over 30 million square feet annually.” The combination of a construction slowdown while demand remains robust will help vacancy compress further. According to Fratt, 15.9 million square feet was absorbed last year, making it “the third highest we’ve ever had, only behind 2021 and 2022.” The first quarter of 2026 has seen this trend continue, with CBRE reporting 4.8 million square feet of absorption and a vacancy rate of 10.2%. The right size Greater Phoenix is a sprawling metro area where people can choose to live in dense urban communities, cozy suburbs or quieter areas still tied to the region’s farming heritage. These agricultural roots also contribute to the availability of sizable parcels that can be quickly converted for industrial uses, as seen along the West Valley’s Loop 303 corridor. Three years ago, Phoenix saw 10 buildings come to market that crossed the 1 million-square-foot threshold. As of Q1 2026, CBRE data indicates that there are no products of this size category remaining. “The overall theme right now is that bigger is better,” Fratt says. “One reason why our million-square-foot market remains so healthy is because Southern California’s is doing well too, so rents haven’t decreased there and the supply is still limited, which helps Phoenix.” John Orsak, executive vice president at Lincoln Property Company, adds that 2025 exceeded the firm’s “realistic but optimistic” internal performance predictions. “Surprisingly, there was a lot of big-box activity. We expected some, but not as robust as it ended up being,” he continues. “We’re fortunate to have product that caters to both small and large users, and we thought there would be some sustained activity in the smaller tenant space, but it had a tough year.” In 2025, the Phoenix industrial market had 14 transactions between 100,000 to 200,000 square feet — more than 50% lower than the historical average of 29 transactions, according to Fratt. Even with available mid-bay space, Mike Ciosek, executive vice president and a founding member of Kidder Mathews’ Phoenix office, says that people shopping in that size range weren’t committing to deals. “That could’ve been based off the potential impacts of tariffs, since regional-type businesses might be leery of how they’d be affected,” he continues. From his conversations with tenants and brokers, Orsak says he never got one overriding answer as to why these users were hesitant — sometimes it was related to tariffs or the broader economy; other times, the business was going through natural growing pains. “Interest rates are still high, and these companies have to finance new equipment and improvements to the space, which puts pressure on costs,” he continues. “It felt like folks in the middle were getting squeezed from all sides last year.” But the opening months of 2026 have seen that shift, with the number of inquiries in this size category picking up substantially, Orsak says. “That’s a common theme we’re hearing from brokers too,” he continues. “I hope it continues to build steam, and we can start converting these inquiries into leases.” Novel needs The first half of the decade has ushered the Valley’s industrial sector into a new era at a time when the U.S. economy is adapting to shifts in global trade, advancements in AI and changing consumer preferences. Today’s buildings have different requirements to meet these demands, including one that is visible from the curb. Orsak recalls that 15 years ago, what qualified as a large industrial facility now seems quaint. “A 250,000-square-foot building was huge then. We’d be asking if one tenant could even take the whole thing, or if we would need to divide it up,” he continues. Beyond bigger footprints, tenants have become more sophisticated in their operations. Orsak notes that warehouses once simply stacked products on the floor and on some elevated racking. “Now, there are buildings with 50-plus-foot clear heights using automated cranes and picking systems,” Orsak says. “That means companies are being more creative with vertical space. The higher you can stack, the more efficient you can be with your real estate.” As robotics have been integrated into these facilities, more servers are needed to support the network, along with dedicated rooms to keep them from overheating. These advancements — along with quality-of-life improvements such as using HVAC rather than evaporative cooling — mean that sites have greater power needs than in the past. “The majority of tenants, big or small, want HVAC,” explains Phil Heanel, executive vice chair at Cushman & Wakefield. “Over the last few years, we’ve seen owners convert second-generation buildings from evaporative cooling to HVAC on a spec basis, which costs around $9 per square foot.” With more advanced manufacturers coming to the Valley, demand for facilities that accommodate energy-intensive processes has grown. Ciosek recalls it used to be rare for tenants to ask for a megawatt, but those requirements have increased significantly. “Typically, a 150,000-square-foot building with 3,000 amps of power would put you in a good spot,” he continues. “But now, more users want at least double that capacity. It’s hard to say if they really need all that power, but you’ll never meet a manufacturer who doesn’t want the max.” The density of higher energy requirements has put strain on the grid, but Fratt says the region is positioned well relative to other industrial markets along the West Coast. Last year, the Valley absorbed approximately 150% more space than the Inland Empire and 210% more than Las Vegas. “We continue to outperform our competitors because of the business environment here and the semiconductor ecosystem that no other region in the country has,” he concludes. “The future continues to be bright for the industrial market in Phoenix.”