Valley's Industrial Slumps with National Economy

PHOENIX-Metropolitan Phoenix’s industrial vacancy rate has jumped nearly a full percentage point as more than 1.8 million sf of space comes back on the market, according to the latest survey by Grubb & Ellis Co.’s Phoenix office.

The metro’s rate is now riding at 7.2%, up from 6.3% at the start of the second quarter. During the quarter, the Valley experienced negative net absorption of 1.86 million sf. “I’m definitely seeing a slowdown in activity and absorption,” Pete Klees, an industrial broker with Grubb & Ellis, tells GlobeSt.com “It’s been slow all year, but was more accentuated in the second quarter.”

Companies are reticent to expand or open new industrial sites during a time when the national economy is in a fragile state. Most tenants plan to wait until there are signs that the economy has turned around before they consider leasing more space, Kleessays. “That’s what I’m hearing time and time again,” he says.

The slowdown in lease activity has occurred fairly evenly across all submarkets in the Valley, Klees says, although some have been hit harder than others have. “There is negative absorption in some and positive in some and it’s washing out to not a whole lot of pluses,” he says.

Seven of the 10 designated submarkets showed negative absorption during the second quarter. Vacancy rates range from 4.1% in the west central Phoenix area to 12.6% in the southwest Phoenix submarket.

During the second quarter, the southwest Phoenix area showed the most negative absorption and saw vacancy climb from 9.2% to 12.6%. Southwest Phoenix had more than 1.2 million sf of negative absorption during the quarter in stark comparison to the more than 650,000 sf of positive absorption recorded in the first quarter. The negative absorption is dual fold: activity decline and the near three million sf of new product brought to market in the first half of this year. Upward of another three million sf is to deliver by year’s end. The southwest Phoenix area is home to most of the Valley’s large distribution and warehouse facilities.

There is more than 7.3 million sf of industrial space under construction Valley-wide and another 5.8 million sf in the planning stages. A number of developers were well along in new projects when the economy took its dive, prompting would-be tenants to scale back expansion plans.

Northwest Phoenix was the Q2′s top performer, absorbing 158,000 sf. The area is increasingly popular with industrial tenants, who are attracted to the growing population and employment base and Loop 101 that swings through the West Valley.

Phoenix has been spared from taking an even harder hit in the industrial market because job creation and population growth remain solid for metropolitan Phoenix. “Phoenix has been insulated from the very worst news,” Klees says.