Phoenix Leads the Nation in Shortage of Small Bay Industrial Space

Article originally posted on CoStar on February 15, 2023

The Valley’s Small Industrial Spaces are Flying off the Market in Record Time

Though large industrial lease signings dominate news headlines, demand for space at Phoenix’s small bay properties is quietly leading the nation. The median time to lease for local industrial spaces smaller than 50,000 square feet has plummeted from an average of seven months in the decade leading up to the pandemic to just two months in 2022. Phoenix ranks fastest in the U.S. for this metric, ahead of notoriously ultra-tight industrial markets like Los Angeles and Miami.

The relatively fixed supply of small industrial buildings is one key benefit for owners across the U.S. who specialize in managing these properties. With most industrial developers focused on the economies of scale achieved from building giant distribution centers that typically lease to tenants larger than 100,000 square feet, the stock of properties catering to small industrial users is barely growing over time.

Phoenix is no exception. The market is home to more than 9,000 industrial properties smaller than 50,000 square feet total, but the total square footage of properties in this size range has only grown by 0.2% annually over the past ten years. More than 40 million square feet of industrial development is currently under construction in Phoenix, but properties smaller than 50,000 square feet represent less than 2% of this space.

While the stock of smaller industrial properties is growing at a snail’s pace, over the long term, Phoenix has been a leader in small business growth in sectors that drive small bay industrial leasing such as construction, manufacturing, transportation and trade. From 2014 to 2019, the most recent five-year period where data is available, Arizona recorded employment growth of 6.7% among businesses in these sectors with fewer than 50 employees, more than double the U.S. average of 3.1%.

The net result of this imbalance between supply and demand is that the few smaller industrial spaces coming available are leasing at a record pace. For example, during mid-2022, OBI Conqueror, a Mesa-based recreational motorsport maker, signed a five-year lease for 25,100 square feet at a Tempe building just one month after the space came to market. OBI plans to use the site to manufacture various models of their camper line.

More recently, Fast DMS snapped up a 6,900-square-foot block of space at Tempe Southern Business Center in September that was on the market for only a month. The local procurement company connects customers who need replacement parts with its network of manufacturers. The warehouse is the firm’s only location.

With the local housing market faltering and fears growing over the risk of a recession during 2023, there is risk that small businesses that drive small bay industrial leasing will come under economic pressure in the near-term. However, over the long-term Phoenix’s shortage of smaller industrial spaces is likely to remain in place.