Phoenix Industrial Rent Growth Reached New Cyclical High in Second Quarter of 2019

Article originally posted on CoStar on July 17, 2019

Strong demand for Phoenix industrial properties helped propel annual rent growth, at 6.7%, to a new cyclical high in the second quarter of 2019. Logistics and flex buildings had the strongest rent increases at 7.5% and 7.6%, respectively, while specialized industrial was at 4.2%.

Last quarter’s rent gains were more than 100 basis points above the National Index and marked the first time Phoenix beat the national average in consecutive quarters since 2014.

Although the Valley of the Sun has been one of the most aggressively built industrial markets in the U.S. in recent years, the growing need for logistics, flex and manufacturing space have kept fundamentals in check. In the past 12 months, about 7 million square feet has been absorbed and roughly 7.8 million square feet of new supply delivered. The vacancy rate is well below the long term average, maintaining a fairly competitive environment among tenants seeking industrial space.

A rapidly expanding population and strong job growth have been the backbone for industrial demand. At 2.2% year-over-year, Phoenix’s metro area population is growing at more than three times the national average. Annual job growth was twice the national average, or about 3.1%, at the end of last quarter.

Even with the recent surge in rent growth, Phoenix’s average industrial rent is still below the national average. When compared to Western markets, the Valley of the Sun offers an even steeper discount. San Francisco rates are about 2.5 times those in Phoenix, while Los Angeles and San Diego rents are more than 50% higher.