By Aaliyah Koelzer and Roland Murphy for AZBEX
A near-capacity crowd filled a conference room at the SkySong Innovation Center this week to hear the latest trends and concerns in the Valley’s shifting Industrial development market at the BEX Leading Market Series panel.
Some of the most prominent players in the field expressed their opinions—both data-driven and personal—about how 2023 has unfolded and what lies ahead.
The panel was comprised of:
- Tammy Carr, Director of Business Development, Brinkmann Constructors – Moderator;
- Alex Boles, Senior VP of Investments and Development, ViaWest Group;
- Rusty Kennedy, Managing Director, Stream Realty Partners Industrial Division, and
- Blake Wells, VP of Preconstruction, LGE Design Build.
The event was sponsored by Brinkmann Constructors.
After a brief introduction by BEX Founder and President Rebekah Morris, the panelists wasted no time jumping into their respective takes on current market statistics.
Kennedy started off with upbeat anecdotes on 2023 productivity. He said that 13.5MSF-15MSF of net absorption in 2023 has been, “Historically the best year ever,” if one excludes the outlying 2021 and 2022 industrial booms. Furthermore, vacancy rates sit at a healthy 5.15%.
He added, however, the 49MSF currently under construction was “a possible downer,” in that it could push vacancy toward 13% if everything delivers without any space being absorbed.
Boles, who quickly set himself apart as the foremost optimist of the group, was quick to contextualize that risk, pointing out that 13% possibility “gets cut in half” if the current mega-sized projects in the pipeline and the existing supply of obsolete space are eliminated from the calculation.
Looking at challenges in the market, Boles said it is harder to develop now than it has recently been because of a trifecta of issues: capitalization challenges, high construction costs and long lead times.
Kennedy delivered his own good news, reporting that while construction costs do remain high, they have fallen around 15% from their previous highs and are expected to continue decreasing. Compounding on that point, Boles added that rent rates continue to increase, which has been a saving point for many developers.
Current Projects, Concerns and the 2024 Pipeline
Looking at the 49MSF of industrial developments under construction in the Phoenix metro area, Kennedy said 23% of space has been pre-leased or spoken for. He specifically mentioned Stream Realty’s excitement on being appointed the leasing agent on the sizable Mack Innovation Park project in Deer Valley, which has more than half of its current 950KSF of available space leased.
Kennedy also acknowledged the effect the Taiwan Semiconductor Manufacturing Company development has had on its presence in the Valley, attracting many suppliers to the region, as well as much of the labor force.
Boles and Wells both had concerns to express regarding the type of developments that quickly grew in popularity through 2021 and 2022. They both claimed the Valley has received bloated products in the form of 1MSF-plus “bombers” and spec sites that are too ambitious for the matured 2023 industrial market.
According to Wells, the market is currently too crowded, and larger projects are being cut into phases. The biggest ones being developed right now, he said, are around 300KSF. What used to be a five- or six-building campus is now one- or two-. Boles agreed and said small and mid-sized boxes were still in demand, specifically from Deer Valley down Interstate 17 to Interstate 10.
Finding Deals in a Saturated Market
Despite a strong market, opportunity acts as gold, in that it is hard to find unless you know where to look. The panelists unanimously agreed upon a difficult trifecta of prevailing fundamental market issues: high construction costs, expensive land, and tight lending.
Given these circumstances, location and size are currently crucial factors in success. According to Boles, this is expected to last for at least another six to eight months.
He added, however, that the current situation actually presents the market and industry with a much-needed opportunity to regroup and regain perspective and focus after an extended period of frenzy. He explained to the audience the Federal Reserve’s aggressive interest rate increase campaign has been part of a strategy to slow the economy from its previously unsustainable fever pitch, adding that the Fed could “quickly put its foot back on the gas” when the economy enters more stable parameters.
Staying with the economic focus, Wells again said that construction costs will likely continue to decrease in the foreseeable future, adding that site work costs are typically the overpriced variable in today’s bids.
Kennedy then gave his view on the current price of land in the Valley, focusing on the misinformation and miscommunication between landowners and developers. “Educating landowners on realistic and modern comparative prices while also utilizing possible joint venture structures has forced the market to be creative,” he said.
Advantages and Disadvantages of Booming Cities
Another issue enthusiastically taken up by the panelists was the challenges and inefficiencies city reviewers and councils have added in recent years. Imposing requirements that appear to clash with existing stipulations have caused delays in planning and design timelines. “Cities are tripping over themselves with these conflicting requirements,” Boles stated when discussing a particular unnamed project as an example, where the city required a fountain but lacked the water supply to operate one if built.
“TSMC has not helped” he added, “They have taken the attention of city planners, leaving other projects lacking the attention they need.” They have also taken the most experienced planning staff from cities, leaving existing staff members with less experience and expertise in place and slowing down the process across the board.
Boles added another difficulty is that some areas, such as Mesa and parts of the West Valley, went too far in on distribution projects and are now changing review standards to favor manufacturing-based projects that create greater numbers of long-term jobs.
Wells expanded on the difficulties with inexperienced and under-staffed planning departments, noting the review process is currently taking more than a year across the entire Valley. As a result of lower personnel counts and staff inexperience, he says an inversion has occurred in the standard review process.
In a normal environment, projects would see the greatest volume of comments, input and recommended changes at the beginning of the planning process, with the number and scope decreasing as a project makes its way through reviews.
Now, Wells said, the scale and volume of comments are increasing the farther along a project progresses, adding cost, time and complication to the process in a manner exactly the opposite of the norm.
Power supply for ongoing and upcoming projects was also deemed as one of the area’s most concerning and hardest to address inefficiencies. With the need to meet the demands of Phoenix’s construction boom, power availability lacks the necessary infrastructure. To install the utilities required to sustain the enormous amount of development, considerable thought and time are required, and both utility companies and municipalities would have had to have psychic abilities in place five years ago to accurately predict today’s needs, the panelists agreed.
Adapting New Strategies for the Near Future
Despite the current and pending challenges in the market, the panelists all remain optimistic about the Industrial construction market now and for the foreseeable future. Based on their views of a challenging but promising 15–20-year outlook, they each felt it is safe to say that Phoenix will continue to perform as one of the best markets for industrial real estate development.
Kennedy reminded the audience that the Phoenix and overall Arizona economies have diversified significantly in the last decade-and-a-half, leading to increased stability and wider opportunities. He expressed confidence the market components and players will figure out how best to interact as the “new normal” continues to expand.
Boles once again stressed that the current “little breather,” as he described the market cooldown, is a good thing, and reminded the audience that the Phoenix area’s market fundamentals remain strong.
Wells concurred, pointing out that with the slowdown, developers and their partners can once again focus on building relationships rather than rushing to put out fires in a constant frenzy. That, he said, will ultimately boost quality and strengthen both the industry and the market.