Our new blog series, The Great Acceleration, examines trends that have been pushed forward in commercial real estate sectors, from retail, sports and entertainment, and office, to multifamily, hotels and industrial properties. To ensure that you are alerted when new articles come out, make sure to follow R.O.I. Properties on LinkedIn.
Although the industrial market has lagged in the third quarter of 2020 in construction starts—570,000 SF vs. more than 7.7 million SF started in Q1—this sector has outpaced the other real estate sectors over the course of the pandemic. (Note, as well, that 11.3 million SF of industrial space is currently under construction.) Affordability, a business-friendly environment, and accessibility to major markets have dialed in Phoenix for a wide range of companies seeking to expand in distribution, fulfillment, warehousing, and other industrial aspects.
What’s Driving the Great Acceleration in the Phoenix Industrial Market?
With nearly 5 million residents, the Phoenix metro was not exactly a hidden secret prior to 2020. The effects of COVID-19, however, have pushed forward several aspects of the Great Acceleration:
Increasing appeal of secondary markets. Smaller cities, secondary markets, and suburban areas were already garnering attention as good values and attractive cap rates became more difficult to come by in tier 1 cities and central business districts. According to the Phoenix Business Journal, about 150 industrial prospects are considering Phoenix as a location—nearly a third of which are from California and about one-fifth are international companies.
Expansions and relocations. Amazon, which has had operations in the Valley for more than a dozen years, will be opening 11 new sites for customer fulfillment and delivery by the end of 2020 and two more in 2021. At the end of July, discount retailer Five Below closed on 70 acres of land in Buckeye for an 850,000-square-foot distribution center—particularly notable as a Philadelphia-based company making such a move. MiTek, which makes construction products and software, is expanding its Arizona presence from 24,000 square feet to more than 400,000 in Tolleson.
Online shopping boom puts emphasis on logistics. Directly resulting from the Amazon expansion noted above, last-mile delivery operators and logistics companies have seen an increase in demand due to the rise in online orders and needs for faster delivery. That is precisely what caught the attention of industrial investor CapRock Partners, which recently expanded its Phoenix industrial holdings to more than 1 million square feet and announced plans for additional acquisitions and development. The company cited future demand from ecommerce users and retailers that will need additional logistics space.
Positive overall investment outlook. CapRock is just one example of increased demand for industrial product piquing investors’ attention. Prior industrial investors are continuing to invest, and investors who traditionally invest in other asset classes are shifting to industrial—in large part as a result of ecommerce trends. As such, R.O.I. Properties believes that cap rates for quality industrial assets will remain low, and this asset class will continue to be in high demand, post-COVID.
Repatriating manufacturing and supply chains. Nationally, the coronavirus exposed weaknesses in the global supply chain for everyday goods as well as critical healthcare supplies such as PPE. Although overseas manufacturing might have represented a cost saving in past years, a combination of logistics and tariffs makes US locations relatively more attractive.
While sectors such as multifamily, office, and retail have many unknowns in the near future, the industrial space has several local and national trends acting as a tailwind.
The competition for industrial properties has heated up, and our team is ready to help you navigate the fast-changing markets in Greater Phoenix. To put an expert advocate on your side for buying, selling, or leasing commercial real estate in industrial and other sectors, contact R.O.I. Properties at [email protected] or 602-319-1326.