Article originally posted on CoStar on September 21, 2023

Phoenix, Las Vegas and Salt Lake City all recorded double-digit annual rent increases in the 12-month period ending in the second quarter, making them some of the strongest-performing industrial markets in the United States.

These three markets have similar drivers that are supporting outsize levels of industrial demand and rent growth. Common characteristics include robust demographic profiles, strategic location near California, affordable rents and momentum in advanced manufacturing.

Phoenix posted annual industrial rent growth of 15.1% in the second quarter, nearly tripling its pre-pandemic, five-year average of about 5.2%. Industrial users remain attracted to Phoenix’s deep and expanding labor pool, which provides local landlords with ample leverage to achieve aggressive rent increases.

In addition, Phoenix has emerged as a critical link in national supply chains as ultra-tight market conditions in Southern California cause demand to migrate east. The West Valley has benefited the most with the strongest rent gains coming from areas along the Interstate 10 and Loop 303 like Tolleson, Glendale, Buckeye and Goodyear.

Several multibillion-dollar manufacturing operations related to semiconductors, batteries and electric vehicles also are stimulating new industrial demand. Estimates from local officials are that TSMC’s $40 billion investment to build a pair of microchip fabrication facilities in North Phoenix will attract more than 45 new companies to the market to supply and support the project.

These positive factors underpin robust industrial space demand and intensify competition for available space. As a result, Phoenix-based property owners were able to secure historically strong rent gains over the past 12 to 18 months and remain well-positioned over the near term.

Las Vegas industrial rents grew by 12.6% annually at the end of the second quarter. The industrial market is benefited from a growing population, thriving tourism industry and proximity to Southern California. These factors have fueled historic levels of development as nearly 15 million square feet of industrial space is under construction, which is more than 8% of existing inventory.

North Las Vegas is garnering the lion’s share of industrial development due to the availability of land at lower prices relative to the rest of the metropolitan area. The cost of land has translated into some of the lowest rental rates in town, and coupled with robust demand, North Las Vegas was the top-performing area for rent growth last quarter.

Industrial rents in Salt Lake City soared by nearly 15% annually at the end of last quarter. Utah’s capital sees similar benefits as Las Vegas, but advanced manufacturing is a larger part of the industrial picture as it ranked among the top 15 metropolitan areas for the highest percentage of advanced manufacturing employment.

New construction is not as big of a factor in Salt Lake City as it is in Phoenix and Las Vegas — about 7.5 million square feet is underway, or 4.1% of existing inventory. Areas around Salt Lake City International Airport are posting the best rent growth and outperforming the market average.

Industrial rent growth has been on a historic run in Phoenix, Las Vegas and Salt Lake City, but gains are expected to downshift closer to their long-term averages. A glut of supply set to be completed in the coming quarters could accelerate downward pressure on rents if it leads to substantially higher vacancy and availability. Phoenix and Las Vegas are particularly at risk with 11% and 8%, respectively, of inventory under construction.

Despite the short-term outlook, each of these standout markets in the West have long-term drivers firmly in place: above-average population growth, proximity to Southern California ports and industrial rents at relatively affordable prices.