A caveman’s perspective of the Phoenix Industrial Market: First Half of 2022

By: Ian Turner of Commercial Industrial Arizona Advisors

Phoenix, AZ – I like things simple. The reason I like simple things is because I am not that smart. In essence, I am an unabashed caveman. If I can’t boil down an issue or topic to some bullet points, I can easily comprehend, I probably shouldn’t be involved in the project. I am a simple Commercial Real Estate Broker who helps small business owners buy, sell and lease commercial properties. To advise my clients, I often must decipher the conditions of the market and articulate it to them both orally and in writing. I will attempt to do the same for the Phoenix Metro Industrial market from a macro bird’s-eye perspective, and in my conclusions, I will add in some of my micro worm’s-eye observations as well. The metrics we will be discussing are simple: NNN Asking Rental rates, Cap rates/Per Square Foot metrics, and interest rates.

Phoenix MSA NNN Rental rate survey

For the purposes of this exercise, we surveyed Costar for existing NNN Industrial properties that were offering over 10,000 square foot in their inventory. The survey consisted of class A, B, & C Industrial products with heavy zoning in the Phoenix MSA from Goodyear on the West, to Mesa on the East, and from Deer Valley on the North to I-10 Airport Submarket on the South.

This is a good sampler of the submarkets and demonstrates the lack of industrial product for lease in Phoenix MSA. For the purposes of discussion, we will use the metric of Triple Net (Net of real estate taxes, insurance, and maintenance) Price Per Square Foot/Month.

(PSF/Mo) that is the most used convention quoted in the trade area. Roughly 30 properties met the criteria of the survey. I like to bracket things so I can understand them. The table below articulates that the high asking rate was $1.35NNN with the low-cost leader on the west side of $.57NNN. The average NNN asking rate was just under $1 PSF/Mo. To translate that into what a 10k industrial user of space would pay, we would add approximately $.25 to the NNN asking price or +/- $1.25 PSF/Mo. * 10,000 Square Foot for a rental payment of roughly $12,500 per month. Not a small chunk of change in my book for a small business.

The graph below shows Market Rent Growth Year Over Year, which is a steep incline of roughly 13% Year Over Year. This spike has to trickle down to the rise in inflation.

Cap rates & Price Per Square Foot Metrics

Cap rates continue to compress in the industrial market, pushing values higher and higher. Capitalization rates are essentially the rate of return an investor will take for a non-financed return on their investment on an annualized basis. So, in our caveman brains, we can call it an interest rate that we expect to collect on our investment.

The table below shows the brackets of cap rates listed in all Industrial transactions in the Phoenix MSA of over $1 Million dollars.  I would not really focus on the highs and lows of this +/-120 property survey as the goal posts vary greatly. However, the Average is relatively accurate of market conditions of a +/-5.5% cap rate and +/- $165 PSF price tag across the valley as of end of Q2 2022.

Interest Rates

Any Caveman would be remiss if he did not know which way the interest rate winds were blowing. For years we have been speculating that interest rates had only one way to go, but still remained artificially low due to government policy. As of January of 2022, the Fed has continued to raise rates in hopes of pumping the brakes on inflation.

The graph below shows the precipitous climb in rates over the last several months. I spoke to my primary referral banker at one of the big 3 national banks to get his perspective on the trends.  He said that they are doing deals at 1.5%-2.5% over the Treasury. So that translates into 4.5%-5.5%. As any caveman knows, interest rates are built into the cap rate. So when interest rates go up, so do cap rates. Cap rates go up, then values go down.  It’s enough to give a caveman a headache.

Conclusions and Observations

This is a great time to be selling your real estate, and a not so great time to be buying or leasing Commercial Space. A Caveman knows this from the data and he knows it from doing deals on the street. This is a Seller/Landlord market and it is likely to be so for quite a while.

The overarching good news is, Phoenix continues to grow in both Net Migration (US Census) and in Job Growth (US BLS).  This is, and has always been, stimulated by pleasant weather, good universities, our proximity  to the coast, and lifestyle due to the  lack of density, despite being the 5th largest city in the US.

PHOTO: Ian Turner, MRED, CCIM with Commercial Industrial Arizona Advisors specializes in the sale and leasing of Industrial & Office properties. Ian Turner has been involved in acquisitions, due diligence, financial feasibility, site selection, and valuation and construction management.