Phoenix, Dallas See Shrinking Lead in Industrial Construction

Article originally posted on CoStar on April 17, 2024

Phoenix surpassed Dallas-Fort Worth early this year as the nation’s leader in industrial construction, and this lead is holding firm going into the second quarter, even after several months of slow construction starts and high levels of completions in both markets.

With some of the largest population gains nationwide, Phoenix and Dallas-Fort Worth are garnering attention from industrial developers eager to capitalize on the record growth. The most recent wave of speculative construction appears to be at the end of its cycle, with both regions seeing diminished construction starts at the close of the last quarter. Higher-for-longer interest rates, challenges surrounding inflation and construction costs, and an oversaturation of the industrial space all have played key roles in the scale-back in both markets and across the nation.

About 35.5 million square feet of industrial space is underway throughout the Valley, keeping Phoenix as the top construction market in the nation. While that is a significant amount for a market that averaged 7.7 million square feet in development from 2017 to 2019, it is a noticeable deceleration from a year earlier when builders had over 50 million square feet underway.

The pace of groundbreakings has been slowing over the past eight quarters and was down 35% annually in 2023. Though recent completions and the still-hefty construction pipeline are expected to negatively affect property performance over the short term, the pullback in starts indicates a reprieve of supply additions could be in store by late 2025 and 2026.

The wave of construction overshadows a resilient demand picture. Stout demographic factors, along with strong momentum in advanced manufacturing and supply chains, have kept leasing and absorption — the change in occupancy in a given time period — above pre-pandemic levels.

Amazon made a splash to start the year by signing three leases over 1 million square feet in newly built properties in the West Valley, reiterating the region’s attractiveness as a logistics option. The area’s Loop 303 Corridor, as well as the Phoenix-Mesa Gateway Airport region in the East Valley, have been development hot spots, and empty space could accumulate more quickly here.

With 90% of the pipeline focused on properties larger than 100,000 square feet, small-bay product is expected to remain relatively insulated from supply side pressure. The availability rate among buildings smaller than 50,000 square feet is below where it was entering the pandemic, which could allow small-bay landlords to retain better pricing power than their large-bay counterparts.

Dallas-Fort Worth’s industrial segment had very few new construction starts or completions since the start of this year. Developments under construction are around 30.5 million square feet — down roughly 63% from the previous peak of 83.2 million at the end of 2022. Ongoing projects are primarily driven by logistics facilities, constituting 47% of all current construction.

Of these buildings, only six are for big-box logistics spaces of 500,000 square feet or greater. Forney is the only area within Dallas-Fort Worth hosting two larger construction projects, including the 1.1 million-square-foot facility in the Gateway Crossing Logistics Park. The only other project of this magnitude is occurring across the metro in Alliance as part of the Intermodal Logistics Center being constructed by NorthPoint Development. These two facilities will be the last of this development wave, which has seen 36 of these 1 million-square-feet or greater facilities brought to market since 2020.

These huge facilities have been mostly concentrated in South Dallas and Alliance, where large tracts of readily available and affordable land and access to nearby labor pools helped spur speculative development. Inner nodes also saw play during this building cycle, with the largest industrial building in the entire metro coming online after Amazon’s 2.3 million-square-foot distribution facility was completed just outside downtown Dallas. This rapid expansion has resulted in higher vacancies, as over 27% of the existing properties of this size are vacant, with many facilities still completely empty after being on the market for several months.

With over 16 million square feet of new space being brought to market in the first quarter of 2024, and just a little under 10 million planned for this quarter, Dallas-Fort Worth’s final wave of double-digit industrial construction is nearing its end.