Phoenix and Dallas-Fort Worth Lead 20 Largest Industrial Markets in Demand

Article originally posted on CoStar on December 4, 2023

As demand for industrial space pulls back nationally, Phoenix and the Dallas-Fort Worth region stand out as leaders for change in occupied space over the past year. Both markets report rising change in occupied industrial space at or near 3%, the highest rate among the top 20 markets in the country.

Leading demographics and their key location for logistics make these markets prime for enduring demand at a time when demand is downshifting among major coastal markets.

The Valley is still a leader in industrial demand. The total amount of occupied space has climbed by 12 million square feet so far this year, representing a 3% gain from the end of 2022. That figure ranks Phoenix as the best-performing area among the nation’s 20 largest industrial markets.

Phoenix boasts several benefits supporting underlying industrial demand. The metropolitan area includes over 5 million residents and remains one of the most well-positioned markets in the country demographically.

Logistics users have snapped up space over the past few years, not only to serve the rapidly growing Phoenix consumer base but to establish a distribution footprint in a strategically located region. Proximity to trade points of entry in Southern California and Mexico, along with affordable and available labor, have encouraged expansion. Saddle Creek Logistics, for instance, recently signed on for 570,100 square feet at a newly built distribution center in the West Valley, representing one of the largest space commitments of 2023.

In addition, Phoenix has strong momentum in advanced manufacturing. Businesses involved in the production of microchips, electric vehicles, solar equipment and energy storage are setting up operations here. This in turn draws industrial users that supply and support these projects, fostering a vibrant ecosystem of high-tech assembly. For example, Amkor Technology recently announced plans to invest $2 billion to build an advanced semiconductor packaging and test facility in Peoria, Arizona.

Though demand is elevated, compared with its peers, it has slowed noticeably from the ultra-strong levels seen in 2021 and 2022. Net absorption, which measures the change in occupied stock, surpassed 23 million square feet annually over the past two years in Phoenix, nearly double the level seen this year. The substantial construction pipeline also has begun to overwhelm demand, causing vacancies and space availabilities to rise this year, which is expected to persist into 2024.

Dallas-Fort Worth is a juggernaut for industrial demand, with occupied industrial space rising by 30 million square feet in the past year, the largest volume in the country. Normalizing as a percent, that volume represents nearly 3% more occupied since the end of 2022.

E-commerce, retailers, third-party logistics and manufacturing firms continue to drive leasing activity in the market. Demand for large-bay spaces marches on with 19 leases signed for spaces 500,000 square feet or greater, accounting for 29% of total lease volume so far this year.

Among the largest leases, DrinkPAK, a manufacturer of canned beverages, has committed to 2.8 million square feet across two facilities in Fort Worth: one is located at Alliance at Trammell Crow’s 35 Eagle development and the other is in south Fort Worth at Carter Park. The company will bring 1,000 jobs to the area when both manufacturing facilities are operational.

Demographic tailwinds and its central location in the country make North Texas a prime location for industrial demand. The market offers a wide network of highways, rail and air transport to move goods. Dallas-Fort Worth led the country in nominal population growth in the past year, adding 173,000 new residents from 2021 to 2022. Since 2010, the market has grown 24% to 7.9 million people. Continued population growth and household formation have fueled demand for industrial space.

Even as demand remains above pre-pandemic levels, Dallas-Fort Worth’s vacancy rate is rising due to the sheer volume of unleased logistics spaces coming to the market. Supply levels are double demand this year, pushing the vacancy rate to 8.2%, up 290 basis points.

Moving forward, demand is expected to normalize further over the short term. Nationally, higher interest rates on consumer loans, such as credit cards, along with general economic uncertainty are weighing on goods spending after adjusting for inflation. Business inventory volumes and import traffic also have started to moderate over the past 12 months.

While these factors along with a potential economic recession are forecast to modestly weigh on demand in 2024, the structural underlying demand drivers in both Dallas-Fort Worth and Phoenix are anticipated to keep them among the top industrial demand markets in the country.