Speculative Development Rises As More Industrial Tenants Expand in Phoenix

Article originally posted on CoStar on April 13, 2021

Phoenix’s industrial leasing volume reached an all-time high in the first quarter, and developers are trying to keep pace. E-commerce, distribution and logistics and food and beverage manufacturers are committing to space in Phoenix and contributed to more than 6 million square feet of new leases.

Despite high levels of new supply, tenants occupied more space than what had been delivered in the market in the first three months of the year, which compressed vacancies below 7% — near a historical low.

More than 16 million square feet of industrial product is set to deliver over the next several quarters. About 65% of the space is available for lease, which is high for the market. The large share of speculative supply demonstrates the high level of confidence among developers and lenders.

Construction is concentrated in the Southwest Valley: Glendale, Goodyear and Tolleson. These three submarkets account for 70% of the market’s construction total.

Elevated new supply this year will put some upward pressure on vacancies, according to CoStar’s Base Case Scenario. But vacancies are still expected to remain below the market’s historical average. Despite substantial supply additions, landlords have enjoyed 35 quarters of uninterrupted rent growth, and there are no immediate signs indicating the pace will slow this year.