Phoenix is Contributing to the Rise in National Industrial Real Estate Vacancy?

Commercial real estate headlines often paint a gloomy picture, especially with the struggles faced by office spaces. However, it's crucial to dissect the details before jumping to conclusions. Recent data indicates that the industrial vacancy rate in the United States surpassed 5% in the fourth quarter, with expectations of this trend continuing into 2024 due to new supply outpacing demand.

New Phoenix Industrial Inventory

Phoenix's Impact on Industrial Vacancy

In Phoenix, the industrial real estate landscape is no exception to this national phenomenon. During the peak Phoenix had about 60 million square feet of industrial product in the construction pipeline sitting behind Dallas/Fort Worth at 80 million square feet. The national vacancy rate is projected to stabilize around 6.5% in the second half of 2024, presenting a challenging scenario for the market. Particularly, big box spaces are becoming harder to fill.

Construction Boom and Its Impact

CoStar estimates a substantial 390 million square feet of unleased industrial space currently under construction across the country, set to complete by the summer or fall of this year. The completion of these projects might contribute to the temporary rise in vacancy rates, but experts suggest a potential peak later in the year.

Rent Growth Amidst Vacancies

Interestingly, the industrial sector is considered a sleeper asset class, offering unique opportunities. Despite the rise in vacancies, rent growth is forecasted in most markets for 2024. Owners of industrial properties stand to benefit from renegotiating and renewing leases at rents over 40% higher than pre-pandemic levels.

Resilience in Small to Mid-Sized Industrial Properties

Phoenix New Small Bay Industrial

Despite this, not all segments of the industrial sector are experiencing the same challenges. Small to mid-sized industrial properties are proving to be resilient, with demand for infill space remaining strong. The dynamics of the market suggest that while big warehouses face difficulties, smaller industrial units are thriving. Reason behind the resiliency of small mid-sized industrial is because these products can weather the storm during market cycles. When markets go up, businesses upsize in to larger space, when markets trend down, businesses downsize in to the smaller bays.

Future Opportunities and Investments

For those considering investments, there is optimism for the future. Investing in new construction is predicted to be rewarding in 2025 and 2026, despite a slowdown in new construction starts over the past 12 months. As the market adjusts and evolves, Phoenix and other high growth regions experiencing a rise in industrial real estate vacancy might present opportunities for those willing to navigate the changing landscape.