Phoenix's transition into a supply-chain and advanced manufacturing economy, resulted in a continued surge in speculative development to accommodate the rapidly growing demand. Heading into the second quarter, Phoenix was sitting on the largest development pipeline in the market’s history and second largest nationally  at 58.3 million square feet (msf), which has increased by nearly 2 msf during the quarter. In the second quarter, Phoenix delivered 2.5 msf of industrial space and broke ground on an additional 3.9 msf – bringing the total development pipeline to 60.2 msf.

“After several quarters of record absorption, declining vacancy rates, and nearly three consecutive years of rising rental rates, the market experienced a notable decrease in absorption, a slight increase in vacancy, and a modest decline in rents as compared to Q1 2023. Certainly, one quarter does not make a trend; however, the shift in some of the industrial market’s key performance indicators is a break from recent trends,” said Kevin Helland, Avison Young Senior Vice President – Phoenix.

During the second quarter, the industrial market experienced its first quarter-over-quarter increase in vacancy since Q1 2022 – nominally rising from a record-low 3.9% in Q1 to 4.1% to end the second quarter. Though vacancy increased, it should be noted that 4.1% is tied for the second lowest total vacancy rate on record.

It is yet to be seen whether Phoenix will be able to hold on to recent historically low vacancy rates, but it is a positive sign that vacancies have remained low given the impressive amount of new supply added to the market over the past several quarters.

Direct asking rents for industrial space saw their first decrease in just under 3 years – ending the second quarter with an average asking rate of $0.94/sf per month; a 2.1% decrease from the $0.96/sf per month recorded in the first quarter. Rents dipped slightly during the quarter due to unprecedented amounts of space delivered over the past several quarters.

Much of this new supply consists of distribution facilities and warehouses, which traditionally offer lower asking rates when compared to more complex industrial property types, such as advanced manufacturing facilities.