Strong Net Absorption and Decreased Construction Fuels Vacancy Tightening
Phoenix (August 1, 2025) – The Greater Phoenix industrial market experienced a decrease in vacancy for the first time in seven quarters during the second three months of 2025, according to a report released by Colliers. Decreased construction levels and strong net absorption helped tighten the market during second quarter.
The Phoenix industrial market ended the second quarter with 10.9 percent direct vacancy, marking a 30-basis-point decline from first quarter. This decline in direct vacancy follows seven consecutive quarters of vacancy increases. However, there was a 190-basis-point increase in direct vacancy year-over-year. Available sublease space, which has steadily increased over the past eight quarters, posted a 202,013-square-foot decrease from first quarter. Sublease inventory fell to 8.4 million square feet available, bringing the total overall vacancy to 12.8 percent for the entire market. The Southeast submarket posted the only year-over-year decrease in vacancy rate, dropping 20 basis points to 12.8 percent. The Southwest submarket cluster also decreased in vacancy, ending at 8.2 percent. The Northwest submarket cluster posted the largest increase in vacancy year-over-year, rising 530 basis points to 16.1 percent. Currently, there are four buildings exceeding one million square feet that are 100 percent vacant in the market. These buildings total 4.8 million square feet and represent 9.7 percent of the market direct vacancy.
Healthy leasing activity pushed net absorption to 2.6 million during second quarter, bringing the first half total of net absorption to 6.8 million square feet. Second quarter marked the 21st consecutive quarter of net absorption surpassing one million square feet. That year-to-date total is a 2.9 million decrease compared to the first six months of 2024. The Northwest submarket cluster captured
more than 52 percent of the market net absorption this year. Second quarter brought healthy leasing in larger buildings, with nine new 200,000+-square-foot direct deals signed, compared to only four deals of that size signed during first quarter. The market is benefiting from demand from tenants looking for spaces larger than 300,000 square feet. Litchfield Palms Logistics Park landed the largest deal of the quarter, where American Eagle leased 521,302 square feet.
Construction levels decreased during the quarter to a five-year low of 11.2 million square feet currently under construction. Second quarter marked the lowest level of new industrial deliveries since 2021, bringing 3.5 million new square feet to inventory. The total square footage completed during the first half of 2025 totals 10.9 million. New building deliveries during the second quarter were completed with 26 percent pre-leased. Deliveries in the Northwest submarket cluster accounted for 53.8 percent of the new inventory added during second quarter. The largest delivery was Camelback 303 Logistics Park, consisting of two vacant buildings totaling 616,100 square feet. The decrease in market construction presents an opportunity to absorb the 23.4 million square feet that are currently vacant from buildings deliverd in the past 18 onths.
Rental rates for Greater Phoenix industrial space rose a slight 1.87 percent year-over-year, ending the second quarter at an average $1.14 per square foot. Elevated vacancy, resulting from more than 23.4 million square feet of vacant space delivered since 2024, is putting pressure on rate increases. The second quarter posted a small 1.87-percent year-over-year rate increase, ending the quarter at $1.14 per square foot. Manufacturing buildings captured the largest quarter-over-quarter increase, posting a 1.01 percent elevation to $1.17 per square foot. Warehouse/Distribution properties posted a 2.32 percent decline in rates to $1.05 per square foot. Overall industrial rental rates have increased 45.2 percent over the past three years. For the second consecutive quarter, the Southwest submarket cluster ended with the largest year-over-year increase, moving up 4.21 percent to $0.97 per square foot.
Investor appetite for industrial space in Phoenix remains strong. Sales volume for second quarter reached $956 million, marking a 19.7 percent increase over first quarter. Year-to-date sales volume reached $1.75 billion, marking a 33.5 percent increase compared to the first half 2024. The average price per square foot paid during second quarter rose to $245, marking a 29.1 percent increase year-over-year. The increase was fueled by 18 of the 55 transactions during the quarter trading over $275 per square foot. The Southeast submarket cluster led the market in sales volume for the fourth consecutive quarter. The submarket's $340 million in sales represents 35.6 percent of total sales volume in the market for the quarter.
Current leasing activity in the big-box industrial category offers a positive outlook for the second half of the year. Net absorption is expected to outperform the first half, and with limited new deliveries, vacancy will continue to compress.
Find the full report here Phoenix Industrial Report Q2 2025 Final