Colliers: Q1 Phoenix Industrial Absorption Remained Strong

Historic Deliveries of New Space Drive Vacancy to 11.2%

PHOENIX, (May 6, 2025) – According to Colliers in Arizona, the Greater Phoenix industrial market posted 4.1 million square feet of net absorption during the first three months of 2025, continuing a record of strong leasing in the booming city and placing the metropolitan area as the third top market nationally in first quarter. Despite impressive net absorption, the city posted an increase in vacancy to 11.2 percent because of historic inventory increases and construction deliveries.

Completing multiple build-to-suit projects fueled the 4.1 million square feet of net absorption. This was the 20th consecutive quarter with net absorption exceeding one million square feet and marked a 7.3 percent increase compared to the fourth quarter of 2024. Since 2023, the industrial market has averaged net absorption of 3.9 million square feet per quarter. Tenants have absorbed more than 15 million square feet of industrial space in the past two years. Based on this velocity, the market will require just more than three years to absorb the 50.4 million square feet of current direct vacancy. Kenco Logistics Services signed the quarter’s largest transaction, committing to an entire building of 641,906 square feet at Gateway I-10.

Direct vacancy rates increased 60 basis points quarter-over-quarter to 11.2 percent. This was largely attributed to 4.0 million square feet of new buildings delivering vacant space. Available sublease space increased 910,879 square feet during the quarter, representing 1.9 percent of the market inventory. This marks the seventh consecutive quarter of increased vacancy.

The rapid construction experienced over the past five years added more than 128 million square feet of new space to the industrial inventory. That equates to a 28.6 percent increase of inventory. In comparison, the entire Las Vegas industrial market is 181 million square feet, meaning Phoenix has added the equivalent of more than 70 percent of the Las Vegas market since 2020. These buildings added since 2020 contain 76.9 percent of our market vacancy, totaling 38.7 million square feet. Currently, 15 existing buildings can accommodate a tenant seeking 500,000 square feet or more. These available spaces total 11.5 million square feet and make up nearly 22.8 percent of the markets total direct vacancy.

Tenants looking for smaller buildings are experiencing some difficulties finding availability under 100,000 square feet. These spaces have just a 5.6 percent vacancy, making competition steep to obtain the limited available inventory. Approximately 48.7 percent of vacancies in the smaller size range are located in the Southeast cluster of the metro area.

Greater Phoenix added 7.3 million square feet of new development during the first quarter, which equals 1.6 percent of the total industrial inventory. This marks the lowest level of industrial construction since year-end 2020. Construction levels have declined in recent months, with current under development activity totaling just 12.5 million square feet. Deliveries of new space during first quarter were largely focused in the Northwest submarket cluster, where 5.5 million square feet came online and accounted for 75.5 percent of new space completed. Of the 7.3 million square feet completed Valleywide during first quarter, 4.0 million square feet were delivered vacant. This accounts for 7.9 percent of the total vacancy. The largest project to break ground during first quarter was Nextwave Tempe. The former water park site is being transformed into 689,109 square feet of industrial space within three buildings.

Industrial rental rates softened during the first quarter, decreasing 0.15 percent quarter-over-quarter to $1.12 per square foot. However, the current rental rate is 2.59 percent higher year-over-year. Overall industrial rental rates have increased 51.4 percent during the past three years and have risen 13.1 percent in the past two years. The largest year-over-year increase was experienced in the Southwest submarket cluster, moving up 4.2 percent to $0.97 per square foot. The Southeast submarket cluster posted the largest decrease in rental rates, dropping 1.10 percent to end the quarter at $1.28 per squre foot. Tenant demand for move-in ready space, especially in newer buildings, has motivated landlords to preemptively expend capital to build out speculative office space, install LED lighting in warehouses and add HVAC in advance of leasing.

Investor interest in Phoenix remains elevated and first quarter sales volume reached $799 million, This marked a 69.5 percent increase year-over-year, but a 57.5 percent decline quarter-over-quarter. The market posted an increased average price per square foot of $209, which is a 10.1 percent elevation compared for first quarter 2024. Investment sales during first quarter were fueled by multiple portfolio sales, including a 12-building sale from Starwood Capital Group to BKM Capital Partners containing nine properties in Phoenix and three in Las Vegas. This transaction involved $156.8 million of value in Phoenix and was the largest transaction of the quarter. This deal was followed by a $110 million, six-property portfolio sale between Starwood Capital Group to Longpoint Realty Partners totaling 518,435 square feet.

Uncertainty swirling around the prospect of new tariffs has sparked chaos both locally and worldwide. Theoretically, the long-term goal would greatly improve the US manufacturing sector, but at what cost? The current ‘uncertainty’ has an impact on capital expenditure and willingness of companies to make long-term decisions. Phoenix has the proper economic fundamentals to continue sustained, healthy growth. The area’s commitment to colleges and universities working with top industries to train the workforce has attracted many users. This factor, combined with relatively low taxes, thoughtful infrastructure growth, a pro-business climate and a growing pipeline of high paying companies relocating to the market will help Greater Phoenix ride through these challenging times.

Reference: Arizona Industrial Report Q1 2025 Final