Phoenix, Arizona’s industrial real estate market, recorded record numbers over the past year. According to research by Kidder Mathews, several factors were responsible for the influx of activity, including market drivers, economic conditions, and a positive future outlook. So let’s explore why Phoenix, Arizona, is seeing significant gains in the industrial real estate sector.
What Drove The Market In 2022?
Three primary market drivers stirred interest from investors to invest in the Phoenix industrial real estate market. First, 26 million square feet (SF) was delivered in 2022, setting a record. The 4Q total of 8.96 million SF was also a historic high. In addition, this annual calculation increased the inventory for the market by nearly 10 percent. This number puts the Phoenix metro region in the country’s top five for industrial construction activity. Finally, an estimated 45 million SF is already in the works. As a result, the additional SF will allow more companies to enter the Phoenix area.
A considerable investment made by the Taiwan Semiconductor Manufacturing Company (TSMC) also contributed to the annual totals. TSMC plans to open its first chip plant in North Phoenix in 2024 with an initial investment of $12 billion. The company has since announced an additional investment in the state of $28 billion for $40 billion. Therefore, to give you a sense of scale, the TSMC plant establishment is the most significant foreign direct investment in state history and ranks as one of the largest in the nation’s history.
The final main market driver comes from investors and developers. Their confidence in the Phoenix market continues to be high, pointing to growth indicators and the competitive advantage of investing in the region as strong positives. In addition, competition among buyers has pushed pricing up, with sales reaching a record average of $171/SF, with the average sales price in 4Q tapping $174/SF. This average sales price is up more than 50 percent from sales levels recorded pre-COVID and is still considered affordable compared to other West Coast locations.
The State of the Economy
We all know how economic conditions can impact real estate investment. For example, the Phoenix metro area’s unemployment rate was 3 percent in November 2022. That is an increase of 20 basis points year-over-year from the previous November. These stats are from the Arizona Office of Economic Opportunity, which also states the Arizona adjusted unemployment rate for November 2022 was 4.1 percent, and the national rate sat at 3.7 percent. In comparison, it is clear to see that Phoenix has stable economic conditions.
Speaking of employment, the region’s affordability and the diversity of job prospects have positively impacted employment. Even though rental rates hit a record high of $0.96 PSF NNN, many workers who have lived in cities with more density and higher rentals, Phoenix offers quite a deal by comparison. With a labor market that continues to gain strength, experts expect job growth to level out in 2023. However, the increase in population will continue to keep Phoenix as one of the fastest-growing cities in the US.
The Future Looks Bright For Near Term Investors
Undoubtedly, the performance of 2022 of the industrial real estate market in Phoenix shows how the market has grown and the demand for property there. As a result, investors will see value in the location related to major regional markets, the beneficial demographics in place, and the relatively low cost of doing business. Opportunities abound for investing in a net lease property in the Phoenix industrial market. To learn more about purchasing a Walgreens as a franchise, you can visit Pharma Property Group.
Another factor contributing to the incredible year experienced in the Phoenix industrial real estate market is how much tenants have expanded their businesses. In addition, the increase in square footage has set demand records over the past few years. However, with a record new supply coming on stream, the expansion growth is expected to wane slightly in 2023. The upcoming square footage will likely impact leasing, where the pressure may increase on vacancies and decrease rent growth.
Final Thoughts
When you dig deep into the mechanics of the industrial real estate market in Phoenix, it is easy to understand why the region is so popular with investors. Also, location, pricing, and inventory all play essential roles in the market, contributing to its success. With massive foreign investments on top of it, it is not much of a leap to say that the Phoenix industrial real estate market is hot, continues to be hot, and is one well worth keeping a close eye on for future investment opportunities.
