WESTERN SNAPSHOT, JULY 2010

Phoenix Industrial Market

Markham

Tenants should continue their command of the Phoenix industrial market during the next 18 to 24 months as metro landlords look to generate any incremental revenue they can. Vacancy should hover around the 14 to 15 percent mark through 2011, with asking rental rates averaging $0.51 per square foot. However, the rates are somewhat irrelevant as landlords maintain a practice of offering substantial economic concessions in the form of free rent, over standard tenant-improvement dollars and/or the compression of coupon rental rates. Filling space is their priority and they are making aggressive deals to do it. Tenants will find favorable terms for 2- and 3-year commitments, while landlords are expecting larger rental increases beyond the 3 years of the lease term. Backed by the belief that rental rates will move upward as the market returns, landlords will either pack the back end of long-term leases or agree to only a short-term deal at current rates.

Despite the global recession, corporate America has almost $2 trillion in cash in their treasuries. With money in the bank, eliminating the need for appraisals or loans, these companies are actively pursuing commercial real estate deals in Arizona, from buying land for build-to-suit properties to making lease commitments on space to expand or open new locations (Finding financing continues to be a challenge for smaller, cash-strapped companies). Currently, there is more than 5 million square feet of corporate facility demand for space exceeding 100,000 square feet being tracked. The push to add West Coast operations is a plus for metro Phoenix as the climate, disaster-free environment and an available, educated workforce provide an attractive location for employers.

Some of the more active industries segments include Internet fulfillment operation centers such as Macy’s, Ulta Cosmetics and Amazon; and sustainable-energy companies such as Tower Automotive (465,000 square feet) and Sun Tech Solar (125,000 square feet), which both leased space in Goodyear, and Linamar (80,000 square feet) and Southwest Solar Technologies (60 acres), which both made facility commitments in the Glendale area. Technology and sustainable-energy companies are also exploring the Southeast Valley industrial submarket, knowing that while the product type is smaller, the area offers a highly attractive employee demographic base for employers. One example is PCT International, which leased nearly 100,000 square feet in Mesa for its corporate office. Educational companies are active throughout metro Phoenix, including Grand Canyon College and University of Phoenix. Healthcare also remains an active economic sector. Companies like Banner Healthcare (200,000 square feet) and 21st Century Health (93,000 square feet) are seeking solutions in Phoenix’s East Valley.

As potential users continue to look to Arizona for new West Coast operations, one should anticipate most submarkets to benefit with positive absorption. By year-end 2010, expect the trend of negative absorption that began in 2008 to end, with metro Phoenix posting year-end industrial absorption of nearly 1 million square feet. By year-end 2011 that number could reach 2 million square feet.

Capital-rich investors continue to search out the deals, looking for distressed industrial properties for their portfolios. Unlike other product types, there are relatively few industrial foreclosures for them to acquire. Many larger Phoenix industrial properties are institutionally owned with limited or no debt. Even owners with some debt are finding ways to hold on to their properties, including lenders amenable to workouts.  Investors willing to look at smaller properties will find more options to choose from.

Metro Phoenix industrial infill and fringe land is a “tale of two cities.” Fringe land values have fallen 50 to 70 percent from where they were in 2005. Infill property values have held their own from flat to a 10 to 20 percent decrease during the same 5-year period. Infill property has benefited from corporate design/build users willing to pay higher prices for entitled, improved and development-ready land. Corporate land buyers with plans to build include The Home Depot, Café Valley, Holsum Bakery, McLane Foods and an undisclosed 600,000-square-foot rail user. Government deals, whether land for development or purchase/lease transactions, have peppered the Valley of the Sun.

During third quarter 2010, metro Phoenix will continue to take small steps toward a stabilized industrial market. While tenants will continue to benefit from current market conditions, increased activity will push the Arizona industrial marketplace back towards equilibrium.

Andy Markham is executive vice president in Cassidy Turley BRE Commercial’s Phoenix office.

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