The industrial real estate market in Greater Phoenix maintained a record pace in the first quarter of 2021. This is evident from research by Colliers, which highlights the remarkable industrial market in Greater Phoenix. Construction reached an all-time high, while net absorption momentum suggests this year will slightly outperform 2020.
Around 17.8 million square meters of new industrial space is currently being built, which is a record for construction activity. Further projects are in preparation and construction is expected to begin this year. 85 percent of this area will be developed in the Northwest and Southwest submarket clusters. The Sarival Logistics Center, a 1.15 million square foot distribution center in Loop 303 and Bethany Home Road, is one of the largest projects launched this year. 10 West Commerce Park in Buckeye began construction of a new 862,000 square foot distribution facility. The Northwest submarket delivered the most new inventory in the first quarter, covering 2.0 million square feet. In the past 12 months, this area has added more than 5.7 million square feet of new industrial space.
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The net absorption for the first three months reached 5.1 million square feet. That figure represents 38 percent of the total net absorption for all of 2020, which was already achieved in the first quarter. This was the second quarter in a row that all five submarket clusters had positive net absorption. Walmart pledged 1.2 square feet in 303 Park near 303 Loop and Glendale Avenue. Gatorade’s parent company, Pepsi, has committed to expanding 750,000 square feet near its current facility in Tolleson Corporate Park.
The vacancy rate at the end of March was 6.6 percent, which corresponds to a decrease of 80 basis points compared to the previous quarter and 110 basis points compared to the previous year. This is noteworthy in that the decline occurred over a period when 2.9 million square feet of new inventory was being completed. This new product came onto the market with just 39 percent vacancy. This shows the rapid drive for speculative development and the speed with which large blocks are leased. The northeast submarket has the lowest vacancy rate at just 3.0 percent. The southeast cluster and the airport area recorded the largest decline in vacancies year-on-year, at 5.5 and 4.6 percent, respectively.
Overall, the leasing rates continued to rise in the first quarter of 2021. They were up eight percent year over year and ended the quarter at $ 0.64 per square foot. This corresponds to an increase of 1.59 percent in the first three months of 2021. The airport area again led the way in rent increases, increasing 14.2 percent year over year to $ 0.81 per square foot. Rapid growth in the Northwest submarket resulted in a rate increase of 9.2 percent to $ 0.67 per square foot. With an increase of 11.5 percent, the production properties recorded the largest rent increases compared to the previous year. Manufacturing buildings in the Northwest Valley saw the largest increase of any product type in the greater Phoenix area, increasing more than 18 percent year over year.
The combination of rising rents and falling vacancies has spurred the sale of industrial buildings. The sales volume of investments in the first quarter was 1.3 percent higher than in the first quarter of 2020. Compared to the fourth quarter of 2020, however, it fell by 26.1 percent. Its largest sales included a four-building, multi-tenant complex formerly known as The Lotus Project. The property covers 473,516 square feet and was sold for $ 91 million. In the first three months of this year, a sales volume of USD 831 million was achieved. The average price per square foot for buildings sold in the first quarter rose 5.83 percent to $ 127. The cap rates fell further to 6.2 percent.
New companies and investors are rushing to Phoenix, creating incredible demand. The vacancy rate of industrial space is expected to increase due to the volume of construction, but rental rates are expected to remain strong and rise as the year progresses.
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