Despite a steep drop in investment levels, Phoenix’s industrial real estate market stayed strong in the fourth quarter of 2022 according to a recent report published by Transwestern Real Estate Services. Rents continued to rise sharply and Phoenix’s vacancy rates remained surprisingly low considering economic factors like stubbornly high inflation.
Transwestern, which tracks activity throughout Phoenix, says 4th quarter industrial inventory topped 350 million square feet. There is also 45 million square feet of space in construction and 120 million square feet of proposed space.
With inflation hitting 12.1% in Phoenix, rent prices continued to tick higher in the last quarter. Rents increased around 10%, from $10.77 per square foot in the third quarter to $11.70 per square foot in the fourth.
Industrial investment levels were hit hard in the final months of 2022. Transwestern reported that investment levels were cut nearly in half when compared with third quarter investments, declining from $960 million to $593 million, an almost 70% dip in investment year-over-year.
Transwestern Senior Research Analyst Jennifer Barili was not surprised by the downturn.
“The industrial market had a very impressive streak of eight quarters of record-breaking investment levels,” Barili said. “While there was a marked decrease this quarter, the activity level was still right in line with pre-pandemic averages. That torrid rate simply couldn’t continue, and the hot investment market needed to return to equilibrium.”
Transwestern does not expect investment levels and lease activity to sharply decline below equilibrium levels in 2023 due to continued high demand.
Industrial real estate vacancy levels in the Phoenix area have remained incredibly steady throughout 2022, despite inflation reaching double-digits.
In the fourth quarter, vacancy rates reached 4.8%, just 0.2% higher than the previous quarter.
Throughout 2022, rates stayed below the reported 5% vacancy rate that concluded 2021. This is also nearly 3% lower than vacancy rates that reached 7.5% during the peak of the pandemic in 2020, marking a strong recovery for the industrial real estate market.
While the fourth quarter brought a slight downturn, industrial construction levels remain high.
In 2019, less than 10 million square feet of space was under construction each quarter. As Phoenix was coming out of the pandemic downturn in 2021, construction nearly doubled, beginning the year with around 20 million square feet under construction in the first quarter and surging to nearly 40 million square feet by the end of the year.
Construction levels peaked in the third quarter of 2022, reaching a staggering 55 million square feet.