Despite interest rate hikes, two quarters of negative GDP and a cooling housing market, the industrial market remains strong. We can attribute the strength of the industrial market to the growing retail-e-commerce market, new construction market, overseas supply chain relocation and a lack of inventory.
With a handful of 40+ acre industrial parcels recently sold or in escrow, we can expect new to Tucson developers to start breaking ground in the second half of 2022. The vast majority of this new speculative construction will be catered to distributors and manufacturers occupying 20,000 SF + bays. There has been some talk of interest rates affecting new developments and banks starting to underwrite these developments more conservatively. Recently, we have seen an increase in seller carry back financing and expect to see this trend grow.
User demand for large industrial parcels of land continues as China faces more shutdowns which is driving companies to relocate their manufacturing to the US and Mexico. We don’t expect this trend to slow down any time soon as supply chain challenges look more long term than short term.
So far, there has been no new construction of bays less than 5,000 SF which is putting pressure on small bay industrial business parks. In addition, upcoming redevelopment projects of industrial property are also a key factor in the limited existing supply. Currently, the vacancy rate is below 5% as out of state investors are purchasing property at record low cap rates. To justify the low returns, out of state investors are raising lease rates at least 20%. There have even been reports of 80% increases from out of state investors in lease rates for incubator industrial buildings.
Building materials seem to be flattening while commodities such as steel, copper and lumber start to drop in price. Inflationary pressures continue to affect small and large businesses, especially in the transportation sector as fuel and energy remains high. The two largest problems that businesses are facing today is a lack of labor and inflationary pressures.
Arizona is one of the best positioned states right now as migration continues, supply chain is moving from overseas to Arizona after covid shutdowns disrupted the supply chain, and copper demand continues to increase as the EV, electronics and solar market grows rapidly.
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Max Fisher, Industrial Properties Broker