National: Industrial/Manufacturing Sector

Although economic data continued to post mostly positive numbers in Q4, rate hikes and higher borrowing rates continued to slow pockets of the economy. At this stage of the cycle, we would categorize the industrial sector as softening but still well-supported in a challenging economic environment. Support continues to come from the resilient consumer, the continued growth of e-commerce, and renewed motivation by U.S. producers to bring supply chains back onshore.

Exhibit A

Highlighting the slowing industrial sector was November’s Manufacturing PMI data which printed its first contractionary report in 29 months (Exhibit A). New orders, production, prices, imports, and inventories all dropped from the prior month. The report did show underlying strength, however, as November marked the 30th straight month for production growth.

Other economic indicators continue to show broad-based support. The Industrial Production Index (Exhibit B), which measures real output for all manufacturing, mining, electric, and gas facilities located in the United States, remains just off historic highs at 104.7. And finally, e-commerce as a percent of retail sales is ticking up once again and remains elevated compared to its pre-COVID trend. That indicator currently stands at 14.8 percent (Exhibit C).

In terms of industrial real estate fundamentals, the data remains steady over the past quarter; vacancy rates sit at historic lows at just under 4 percent, market rents (Exhibit D) continue to steadily trend upwards and net absorption across most regions remains well into positive territory (Exhibit E).

Exhibit B

The one fundamental area that needs to be monitored is construction starts (Exhibit F) as new deliveries continue to break records. That said, many expect construction levels to fall in 2023. Recently, Prologis predicted that due to the rising cost of capital, the construction pipeline will shrink by about 50 percent in 2023. Others with similar forecasts highlight elevated construction costs as reasons for a drop in construction levels over the coming 12 to 24 months.

Exhibit C

Despite elevated levels of new supply today, we anticipate a continuation of healthy industrial space demand for the foreseeable future. This opinion is a direct result of our expectation of continued long-term growth of e-commerce, and the recent pullback from Globalization and growing domestic supply chain needs.

Exhibit D
Exhibit F

Phoenix: Industrial/Manufacturing Sector

Demographics remain strong across the Phoenix market. Although house prices have dipped over the past few months, the region remains well supported as population growth continues to outpace the rest of the country. Additionally, with an aging national population’s desire for warm weather and an ongoing attractive cost of living relative to more expensive coastal cities nearby, the Phoenix market should continue to experience above average population growth for the foreseeable future.

Exhibit G

The industrial sector in Phoenix continues to see significant demand because of challenges across the industrial markets in California. Phoenix offers much cheaper real estate, and the ability to reach more than 30 million consumers within a day’s drive. As an example of industrial support across Arizona, according to the Arizona Commerce Authority, there are currently 228 manufacturing projects in the pipeline, totaling $328 billion in capex, and 122,000 new jobs.

As for Phoenix industrial property fundamentals, vacancy rates remain at 4 percent (Exhibit G), and just like the national trend, rental rates continue to rise steadily.

Also just like the national trend, construction starts remain in record territory (Exhibit H)
despite much of the space built without a tenant in place. Developers feel comfortable with this risk despite concerns over an economic slowdown given the aforementioned attractive characteristics of the Valley along with significant demand from the manufacturing, logistics, and data sector industries.

Development continues on the west side of the city outside of Goodyear and Glendale where land is cheaper, with massive industrial parks underway along the Loop 303 freeway. In the East Valley, numerous projects continue to progress in the Phoenix-Mesa Gateway Airport area including Gateway Grand, the Cubes at Mesa Gateway, Gateway 202, and Power 202 Logistics.

Exhibit H

In terms of recent tenant news over the past couple months, TSMC’s announcement of a second computer chip fabrication facility in North Phoenix grabbed the most headlines. This facility is estimated to increase TSMC’s investment to the overall project to about $40 billion, which would be the largest foreign investment in Arizona’s history. This second facility is expected to open in 2026. Other transactions over the past six to 12 months include:

  • Best Buy pre-leasing 800,000 SF of distribution space along the 303 in Goodyear
  • Puma signing a lease for 1M SF
  • Lowe’s pre-leasing 1.2M SF out by Mesa Gateway
  • Virgin Galactic opening a manufacturing facility in the Southeast Valley
  • Corning signing a new lease for 317,000 SF in Gilbert
  • Winsupply, a wholesale distributor of construction and industrial materials, signed on for 363,000 SF on Gateway 303
  • MLILY, a mattress manufacturer, signed a 1.2 million SF lease at G303 in Glendale
  • Facebook expanding a data center project in East Mesa to a total of 2.5 million SF

From our perspective, the tailwinds supporting the Phoenix Industrial market remain in place. Even if the economy enters a recession, we anticipate that demand for industrial space across the Phoenix market will remain robust due to the macro changes occurring across the U.S. in relation to spending habits and supply chains.

Ryan Steele is with Keyser, a corporate real estate advisory company located in Scottsdale, Arizona. Connect with him on LinkedIn or reach out at


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