Mesa Sees Spike in Industrial Vacancies

Helping put the vacancy rate in real terms, the report states that there are currently 13 fully vacant buildings in the Valley that are larger than 500,000 square feet.

The industrial real estate market is significant for Mesa because the city has seen a frenzy of industrial building in recent years.

 Late last year, the Phoenix-Mesa Gateway Airport zip code earned the distinction of having the largest pipeline of speculative industrial buildings in the country.

Mesa’s large inventory of available industrial buildings provides opportunities for business expansions and attractions, but it also poses risks if demand dries up. 

The report from the investment management firm Colliers cautioned that the Phoenix Metro region’s vacancy rate would have been even higher this past quarter without big moves from a single user: Amazon.

The online shopping giant leased 3.4 million square feet of warehouse space in Glendale and Goodyear in the first part of 2024. That was more than 45% of all the market activity last quarter.

What’s driving the current rise in vacancy? The report indicates that part of it was softening demand.

“Anticipation that the Fed would be cutting interest rates kept a large pool of buyers on the sidelines,” the report states.

In an effort to curb inflation, the Federal Reserve started raising the cost of borrowing money in 2022. There was speculation that the Fed might cut interest rates for the first time in two years in March, allowing buyers to secure loans on more favorable terms.

Policymakers decided to keep rates steady for now.

Colliers’ industrial real estate report seems to pin more of the blame for higher vacancy on the tidal wave of new supply coming to the industrial real estate market rather than falling demand.

As the report notes, the consumption rate in the first quarter of this year was higher than the previous three (though lower than the same period last year).

But the healthy demand for industrial space is being met by robust supply.

“Deliveries of new space have outpaced leasing activity, pushing vacancy to reach its highest level since 2017,” the report states.

Builders completed 9.7 million new square feet in the first three months of 2024.

The Southeast Submarket that encompasses Mesa had 3 million square feet of that – the second-highest new supply after the Southeast region, which includes Goodyear and Buckeye.

The report saw signs that investors are starting to turn down the spigot of new industrial building starts.

“The current level of 33 million square feet under construction is a 29.3% decrease in activity compared to first quarter of 2023,” the report states.

The bad news is the market won’t feel this year’s slowdown in new industrial projects for some time. The report predicts that “increased levels of construction in 2023 will bring a wave of deliveries throughout 2024 that will force vacancy rates higher.”

So far, the higher vacancy rate has not caused a drop in industrial rents.

On the contrary, rents continued a steady rise. Last quarter rents grew 3.1% from the prior quarter, and 10.3% over the previous year. But industrial rent did not rise fast as they have in recent years, climbing at a more modest, “healthier” rate.

Colliers hints that growth in rental rents might not last if higher vacancy persists.

“The large uptick in vacancy has led landlords in certain areas to acknowledge that they now need to compete more for tenants,” the report states. “The shift is forcing concessions and motivating some owners to fully build out vacant space to attract users.”

The report ends on an optimistic note, pointing to recent announcements from Intel and TSMC that they will use $8 billion in federal investment from the CHIPS and Science Act to build three additional semiconductor fabs in the Phoenix metro area.

“This infusion of capital will benefit us immensely, both with those companies and the ancillary businesses that will need space to support their relationships with the tech leaders,” Colliers wrote.