Industrial Real Estate AKA: The Darling?

Well, we are a couple of years into a period where every person everywhere has boxes arriving on their porch every day. If we need a new pad of sticky notes, we simply order that on our phone and then it is brought straight to our door. WHAT A WORLD, right? People in cities all over the country see the Amazon trucks driving the streets. And they also see the Amazon distribution centers (massive warehouses) showing up everywhere. What you may not know is how great the trickle down from this is. It is not just Amazon. There are companies, large and small, jumping on the delivery wagon. In order to make the delivery model work they need a place to store their goods. The result has been an incredible demand for Industrial and Flex type properties.

Tenants are expanding their footprints in the Phoenix area at an unprecedented pace. The market has set new records for demand over the past two years, with the pandemic acting as a tailwind for the sector. The increased consumer dependence on online ordering throughout the pandemic and influx of new residents seeking affordability in Phoenix has fueled demand for warehouse and distribution space.

Amazon alone penned 13 leases from January 2020 through December 2021, while also completing ground-up construction. Its leases range in size from a massive 1.1 million-SF distribution and fulfillment center to a 100,000-SF last-mile facility. The e-commerce giant planted its largest stake in the market late last year upon the delivery of its two-story 2.3 million-SF robotics fulfillment facility in Goodyear.

As we stated earlier though, it is not just Amazon that is driving demand. The largest space commitments in recent months represent a variety of industries, including e-commerce, advanced manufacturing, food & beverage users, pharmaceuticals, and data centers. Tenants looking for turnkey spaces are preleasing buildings before they deliver.

In November, William Sonoma preleased 1.2 million SF that is under construction at The Cubes in Glendale. HelloFresh signed a 440,000-SF lease at Prologis Logistics Center in the Tolleson Submarket in 21Q2. The building is slated to deliver in 21Q4, and the site will be HelloFresh’s largest global production and distribution facility. MLILY, a mattress manufacturer, signed a 1.2 million-SF lease at G303 in Glendale, a development that was completed just one month earlier.

Lastly, Facebook announced it would begin construction on an $800 million data center in the submarket. The first phase will consist of two buildings totaling 960,000 SF near Elliot and Ellsworth roads. The first building is slated for completion in 2023. Facebook will join other data center operators in East Mesa, including Google and Apple.

Move-ins have offset recent closures, and vacancies have compressed to a historic low, despite elevated new supply. Over the past 10 years, steady demand and a conservative level of supply have put consistent downward pressure on vacancies. But the need for modern industrial space motivated developers to ramp up speculative building again. The construction pipeline remains inflated, and some high-demand submarkets in the West Valley will experience some supply-side risks in the near term.

Leasing activity is strongest in the more affordable Southwest Valley submarkets, including Tolleson, Goodyear, and Glendale. Tenants in these submarkets benefit from proximity to Interstate 10 and can access California markets within a one-day truck haul. Meanwhile, advanced manufacturers and last-mile operators are willing to pay a premium in high-growth areas in the Southeast Valley, where they can draw from a strong talent pool.

The outlook is mostly positive, but the market will need to absorb a substantial amount of new supply next year that will put some upward pressure on vacancies. Demand will intensify for last-mile and e-commerce users, data center operators, and manufacturers. Submarkets with a hefty supply pipeline and a large amount of speculative construction, such as Goodyear and Glendale, will be more vulnerable to a temporary spike in vacancies.

In the long term, the demand drivers that have worked in Phoenix’s favor will support industrial fundamentals. These large Industrial Operations have fueled growth in the surrounding areas for housing and retail businesses coming to support the workers.

Now let’s talk about the small business looking for a 1500 S/F to 3000 S/F space that has a couple of offices in the front and then storage/warehouse space in back with a roll up door. This is what we refer to in the industry as a “Flex Space.” All of the small supporting businesses are clamoring for these types of spaces. And you might be looking for one in Phoenix that is all A/C…we call that the search for the Unicorn!

We represent these clients frequently and it takes working the market diligently. We have the resources to watch for new listings and we prepare our clients to be poised to jump on them, and also knowing the properties and networking to find out about upcoming vacancies before they are listed. If you are a small business looking to lease one of these properties, you must be represented by a professional that knows this market.

We always say that in Commercial Real Estate there will be the industry disciplines that are the “Darling” at the moment. As things change, today’s Darling could be tomorrow’s Dog. We are specialists in all of the Commercial disciplines (Office, Retail, Industrial/Flex, Multi Family and Specialty) so we can help today or tomorrow.

*Source is CoStar Group