Industrial Outlook. A substantial improvement in the fourth quarter breathes life back into Phoenix Industrial. Phoenix. Q4 2013

Transcription

1 Industrial Outlook Phoenix. Q A substantial improvement in the fourth quarter breathes life back into Phoenix Industrial 2.5 million square feet of total net absorption this quarter industrial vacancy valley-wide is relatively flat at 11.9 percent due to a very active development pipeline

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3 Jones Lang LaSalle Phoenix Industrial Outlook Q Phoenix industrial overview Economy By most accounts, the Phoenix economy showed us in the fourth quarter of 2013 that continued growth in nearly all facets is achievable. With the Phoenix unemployment rate falling to 6.0 percent, well under the Arizona unemployment rate of 7.8 percent, and job growth at a steady 2.3 percent, the outlook for the Phoenix economy in 2014 looks to stay positive. Looking forward to 2014, there are already signs that those numbers will continue to improve. Many businesses are moving operations to the Phoenix area, such as Apple, which purchased the First Solar building to manufacture glass components for a variety of their products. This specific transaction will be responsible for bringing 2,000 jobs to the Valley. The Phoenix area has shown consistent growth over the years, and 2014 shows no signs of slowing down. With more jobs, comes more people and the 2.6 percent overall projected population growth in 2014 is a strong testament to that. Homes are expected to bounce back, with single family permits forecasted at more than 15,000 units next year. While there is still much to improve upon within the Phoenix economy, the fourth quarter of 2013 showed us that better times are indeed on the horizon, and Phoenix will continue to be a place of high demand for employers. Market conditions Phoenix recorded a very strong end to 2013 with 2.5 million square feet of total net absorption across all industrial product types. This substantial improvement added to year end values totaling 3.6 million square feet absorbed over the last 12 months. Unfortunately, 2013 fell short of absorption in 2012 when almost 5.5 million square feet was newly occupied. Concerns about political risks such as the government shutdown forced many tenants to delay their real estate decisions until clarity from Washington was guaranteed. Many corporate occupiers continue to hold off on any strategic decisions until the last minute to make sure they have an accurate understanding of their space needs. These users need to move to existing buildings in order to accommodate their timing requirements. With that in mind, Phoenix will likely benefit significantly in the long term by attracting major corporate occupiers because the valley has a critical mass of high-quality, institutional grade spec projects that are ready for occupancy. The last time Phoenix delivered a significant amount of spec space, the end result was that Amazon made commitments in excess of 4 million square feet because those projects had already been built. Tenants are intent on controlling their real estate costs; however, labor and transportation have a far more significant impact on their financial performance, so the need to do a really cheap real estate lease transaction is not as important as locating in the right market and the right facility. The bulk of activity stems from the e-commerce companies and logistics groups, based on a growing consumer economy and the need for same-day delivery through internet sales. The development pipeline remains very active in Phoenix with 4.2 million square feet currently under construction. Five projects were delivered in the fourth quarter, adding 1.4 million square feet to the existing inventory. Three of these new buildings currently stand vacant awaiting their next tenants. The majority of recent spec development in the bulk distribution sector is controlled by institutions and REITS with long-term strategies. That said, there may be some rental rate compression, however the downward pressure on rents will not be as significant as some may expect, given investors belief that Phoenix has become a premier logistics location as an alternative to California. Our neighbor to the west continues to have issues with their tax structure and business environment and most investors believe this will bode well for Phoenix in the long term. industrial market (owner occupied included) Supply Construction Direct vacancy vacancy Demand Pricing stock Under construction Rate Trend Rate Trend Q net absorption Average rental rate (NNN) Warehouse / 185,870,291 1,786, % 12.1% 2,635,133 $0.43 Manufacturing 61,556,070 2,430, % 14.1% -123,300 $0.63 Industrial Market 248,986,389 4,216, % 11.9% 2,453,256 $0.44 Flex / R&D 31,669, % 20.1% 325,109 $0.91

4 Landlord leverage Jones Lang LaSalle Phoenix Industrial Outlook Q Phoenix industrial overview, cont. Outlook The industrial landscape in Phoenix is set up for a strong performance in As fiscal insecurities and government risks fade into the background, construction and housing will drive the recovery through the next year. A handful of larger tenants over 200,000 square feet are ready to commit to space and smaller users will continue to stay active as home building gains momentum. Steady job gains are expected to continue with Trade, Transportation, and Utilities and Construction leading the way. Phoenix is not only a great alternative to California as a logistics market, but the valley boasts a continuously growing consumer base due to consistent population growth that is again gaining traction since its pre-recessionary highs. Plenty of sunshine, a high quality of living, and a great business-friendly environment will differentiate Phoenix as one of the top markets for companies, large and small, in the nation. Trend spotlight Leasing activity was relatively slow at only 11.3 million square feet in 2013, but is expected to increase in 2014 with more fiscal clarity from Washington. industrial market vacancy, excluding Flex properties, is now 11.9 percent. A handful of large speculative construction buildings continue to stand vacant as activity among larger users is slowly gaining traction. Rental rates are expected to remain relatively flat due to an abundance of new industrial construction coming to market. Apple is setting up manufacturing operations in the Phoenix metro and is expected to attract many more complimentary users. Phoenix property clock Peaking market Rising market Falling market Bottoming market Tenant leverage Manufacturing Phoenix Overall Flex Warehouse &

5 $0.36 $0.35 $0.54 $0.51 $0.48 $0.48 $0.48 $0.62 $0.59 $0.59 $0.77 Jones Lang LaSalle Phoenix Industrial Outlook Q Phoenix industrial overview, cont. Average monthly asking rental rate (NNN) YTD net absorption $0.90 Southwest 1,101,491 $0.80 Grand Avenue 631,014 $0.70 Airport 615,144 $0.60 Northwest 335,002 $0.50 $0.40 $0.30 $0.20 $0.10 $0.00 Scottsdale Deer Valley Mesa Ahwatukee/Chandler Gilbert 51 Corridor Tempe Northwest Airport Grand Avenue Southwest Deer Valley Ahwatukee/Chandler Scottsdale Mesa Gilbert 333, , , ,704 22,029 Tempe 51 Corridor (11,242) (107,316) -500, , , , ,000 1,000,0001,250,000 Pricing trends Rents continue to inch upwards in most submarkets as activity slowly begins to increase. The Flex market recorded a negative quarter as asking rents returned to $0.91 per SF, NNN, across the valley. Manufacturing product continues to struggle as rents fell from $0.64 to $0.63, while rents across Warehouse and properties remain stable at $0.43. Mesa and Tempe were the only two submarkets that recorded incremental decreases in asking rents. Ahwatukee/Chandler posted the largest gain increasing by 2.9 percent to $0.59 per SF, NNN. Demand trends Southwest recorded the greatest absorption gain in the fourth quarter with over 1.1 million square feet of total net absorption. Tempe and the 51 Corridor were the only two submarkets that recorded absorption losses this quarter while all other submarkets recorded positive net absorption gains. This is a testament to the increased activity amongst smaller and mid-sized users who are growing with the Phoenix economy. Stabilization of the U.S. budget crises and no government shutdowns expected is anticipated to release tension and allow the active tenants that were unwilling to make a commitment in 2013, to secure space in 2014.

6 Jones Lang LaSalle Phoenix Industrial Outlook Q Phoenix leased industrial market [excluding owner occupied facilities] Methodology The leased industrial sector excludes owner-occupied product from the data set and provides a rental equivalent perspective for industrial buildings that are leased by tenants. Buildings can move in and out of this data set based upon being purchased or sold by a particular user. Recent lease transactions Tenant name Location Submarket Deal type Size First Solar 2950 South Litchfield Road Southwest New 418,200 Mega Furniture 3941 West Mohave Street Southwest New 144,000 AZ Nutritional Supplements Tenants in the market 6850 West Morelos Place Ahwatukee / Chandler New 126,251 Tenant name Submarket concentration Size requirement Undisclosed retailer Market-wide 1,000,000 Sports retailer Southwest 500,000 Keuhne & Nagel Market-wide 200,000 Sector trends Direct and Vacancy rates across the leased industrial market have remained flat this quarter at 16.4 percent and 17.5 percent respectively. Lease rates have also remained relatively stable this quarter with warehouse / distribution product at $0.43 and leased manufacturing at $0.65. The fourth quarter saw 933,746 square feet of positive net absorption across all leased industrial space. The majority of positive net absorption was seen across warehouse / distribution product with 1.3 million square feet while manufacturing product recorded a negative 175,192 square feet of net absorption. The Flex/R&D market recorded 315,066 square feet of positive net absorption this quarter bumping total vacancy down to 23.3 percent. leased industrial market (excluding owner occupied facilities) Direct Overall Demand Pricing Supply total vacancy vacancy Q net Average rental stock rate rate absorption rate (nnn) leased industrial market 157,598, % 17.5% 933,746 $0.44 Warehouse / 131,265, % 16.4% 1,328,684 $0.43 Manufacturing 34,708, % 23.6% -175,192 $0.65 leased Flex/R&D market 27,074, % 23.3% 315,066 $0.91

7 Jones Lang LaSalle Phoenix Industrial Outlook Q Phoenix industrial capital markets overview The fourth quarter saw over $330.4 million of sales volume, and remained relatively flat compared to the third quarter of $317.3 million. Apple accounts for one of the largest transactions this quarter when it bought a large 1.3 million square-foot manufacturing facility from First Solar for $81.02 per square foot. Aside from Apple s notable purchase, investors are looking to capitalize on value add opportunities primarily in the Southwest and Southeast valley. Land is also increasingly scarce and parcels with proximity to freeways and a strong labor pool will charge a premium. The price per square foot continues its trend upwards and ended the fourth quarter at $82. Average cap rates have continued to fluctuate around 7 percent for most product, but much lower for higher quality spaces. Phoenix select sales Private parties remain the largest buyers of industrial properties in Phoenix, making up 41 percent of the buyer pool year-to-date; however, their share is slowly dwindling as REITs continue to seize on industrial opportunities. Cap rates for quality institutional product have continued to compress based on the lack of opportunities and aggressive capital. Cap rates for good product with market rents in place are expected to be around 6 percent. Rental rates are beginning to stabilize, and rent concessions are slowly going away less free rent. Landlords are also not as willing to pay for moving costs anymore compared to 18 months ago. Tenant improvement allowances, however, remain relatively static and are still primarily paid for by the landlord. Land costs are up by 20 to 30 percent in most submarkets over the last 18 months. Gilbert 3740 South Signal Butte Road Average sales price (p.s.f.) and cap rates RBA 1,328,075 sf Buyer Apple Inc Seller First Solar Inc Price (p.s.f.) $81.02 Date sold October 2013 $100 $90 $80 Avg. price (p.s.f.) Cap rate 11% 10% Southwest North 127 th Avenue $70 9% RBA 603,863 sf Buyer Lake Washington Partners Seller Clarion Partners Price (p.s.f.) $65.66 $60 $50 $40 8% 7% Date sold November 2013 $30 6% Southwest 7200 West Buckeye Road RBA 400,000 sf Buyer UBS Realty Investors Seller Sealy & Company Price (p.s.f.) $65.63 $20 $10 $ % 4% Date sold December 2013

8 Jones Lang LaSalle Phoenix Industrial Outlook Q Appendix Statistics Large block availabilities Construction map Contacts

9 Jones Lang LaSalle Phoenix Industrial Outlook Q Phoenix industrial market statistics Submarket inventory Direct vacancy vacancy Direct availability availability Q4 direct net absorption YTD 2013 direct net absorption Q4 total net absorption YTD 2013 total net absorption Average direct asking rent (monthly p.s.f.) Average total asking rent (monthly p.s.f.) Under construction YTD completions Airport Warehouse / 29,625, % 10.6% 11.9% 12.4% 236, , , ,532 $0.48 $ ,000 Manufacturing 9,321, % 14.6% 18.2% 18.4% -44,438-79,848-44,438-79,848 $0.47 $ industrial 40,312, % 11.4% 12.8% 13.5% 244, , , ,144 $0.48 $ ,000 Flex / R&D 4,750, % 16.8% 17.8% 21.5% -30,486-60,014-30,486-60,014 $0.84 $ Grand Avenue Warehouse / 20,523, % 7.4% 9.2% 9.5% 30, ,876 30, ,876 $0.35 $ Manufacturing 5,957, % 7.6% 11.4% 11.7% 127, , , ,806 $0.44 $ industrial 26,999, % 6.7% 8.9% 9.1% 187, , , ,014 $0.36 $ Flex / R&D 1,989, % 17.8% 18.0% 18.9% -12,293-8,448-4,843-5,998 $0.63 $ Corridor Warehouse / 1,524, % 11.8% 15.2% 15.2% -106,099-90, ,099-90,712 $0.51 $ Manufacturing 691, % 4.6% 4.6% 4.6% 0-6, ,220 $0.50 $ industrial 2,403, % 8.3% 10.5% 10.5% -126, , , ,316 $0.51 $ Flex / R&D 837, % 11.6% 11.5% 11.5% -3,655-7,786-3,655-7,786 $0.72 $ Deer Valley Warehouse / 7,619, % 7.8% 9.1% 9.5% 70, ,364 39, ,382 $0.59 $ ,025 0 Manufacturing 4,535, % 14.3% 16.1% 16.3% 95,952 87,737 95,952 87,737 $1.12 $ industrial 11,165, % 6.1% 7.6% 7.9% 100, ,749 68, ,767 $0.62 $ ,025 0 Flex / R&D 3,565, % 23.4% 26.6% 26.6% 142, , , ,764 $1.08 $ Vacancy: Physically vacant space. Vacancy includes both direct and sublease space. Availability: Space being marketed for lease by owner or sublessor, regardless of occupancy. Availability includes both direct and sublease space. Net Absorption: The net change in occupancy over a measured period of time. Average Asking Rent: Direct monthly values presented on a NNN basis, then weighted by the amount of direct available space in a building. Statistics reflect the total industrial market, including owner occupied facilities.

10 Jones Lang LaSalle Phoenix Industrial Outlook Q Phoenix industrial market statistics, cont. Submarket inventory Direct vacancy vacancy Direct availability availability Q4 direct net absorption YTD 2013 direct net absorption Q4 total net absorption YTD 2013 total net absorption Average direct asking rent (monthly p.s.f.) Average total asking rent (monthly p.s.f.) Under construction YTD completions Scottsdale Warehouse / 5,367, % 11.1% 12.8% 14.2% 62,492 29,917 57, ,917 $0.78 $ Manufacturing 3,190, % 9.8% 23.1% 23.3% 11,263 18,850 8,169 14,456 $0.83 $ industrial 8,156, % 7.9% 14.5% 15.4% 35,845 91,390 31, ,390 $0.77 $ Flex / R&D 4,101, % 18.8% 23.0% 23.7% 77,914 93,158 74,820 89,014 $0.86 $ Tempe Warehouse / 22,411, % 12.6% 15.1% 15.7% 341, , , ,203 $0.48 $ ,000 Manufacturing 8,607, % 8.3% 11.3% 11.5% 52, ,149 52, ,800 $0.85 $ industrial 30,297, % 11.2% 13.4% 13.8% 389,159-5, ,159-11,242 $0.48 $ ,000 Flex / R&D 7,391, % 14.5% 20.8% 22.9% 18,086-91,263 18,086 44,987 $0.98 $ Mesa Warehouse / 6,145, % 12.9% 15.3% 15.8% 25,387 76,195 25,387 82,964 $0.59 $ Manufacturing 2,818, % 3.5% 5.8% 5.8% 6,483 48,450 6,483 48,450 $0.63 $ industrial 9,367, % 9.1% 11.7% 12.1% 24, ,935 24, ,704 $0.59 $ Flex / R&D 623, % 22.2% 21.1% 21.1% 27,938 33,525 27,938 33,525 $0.68 $ Gilbert Warehouse / 10,002, % 12.9% 15.5% 15.9% 111, ,798 90, ,741 $0.55 $ Manufacturing 5,602, % 37.2% 12.8% 14.3% -510, , , ,673 $0.64 $ industrial 15,360, % 20.7% 13.0% 13.8% -372,442 42, ,424 22,029 $0.54 $ Flex / R&D 3,014, % 33.6% 32.2% 32.3% 2, ,442 2, ,442 $0.90 $ Vacancy: Physically vacant space. Vacancy includes both direct and sublease space. Availability: Space being marketed for lease by owner or sublessor, regardless of occupancy. Availability includes both direct and sublease space. Net Absorption: The net change in occupancy over a measured period of time. Average Asking Rent: Direct monthly values presented on a NNN basis, then weighted by the amount of direct available space in a building. Statistics reflect the total industrial market, including owner occupied facilities.

11 Jones Lang LaSalle Phoenix Industrial Outlook Q Phoenix industrial market statistics, cont. Submarket inventory Direct vacancy vacancy Direct availability availability Q4 direct net absorption YTD 2013 direct net absorption Q4 total net absorption YTD 2013 total net absorption Average direct asking rent (monthly p.s.f.) Average total asking rent (monthly p.s.f.) Under construction YTD completions Ahwatukee/Chandler Warehouse / 6,100, % 10.1% 7.3% 7.9% 83,891 25,265 83,891 13,508 $0.60 $ ,251 Manufacturing 8,456, % 8.1% 7.9% 9.9% 11, ,720 11, ,720 $0.71 $0.71 2,430, ,000 industrial 14,190, % 7.7% 6.2% 7.6% 59, ,743 59, ,986 $0.59 $0.58 2,430, ,251 Flex / R&D 3,276, % 20.8% 20.2% 24.0% 105, , , ,832 $0.95 $ Southwest Warehouse / 70,760, % 14.0% 15.5% 16.5% 1,827, ,833 1,827, ,324 $0.38 $0.38 1,497,049 3,917,879 Manufacturing 10,421, % 19.8% 16.2% 21.5% 147, , , ,201 $0.33 $ industrial 83,196, % 14.5% 15.3% 16.8% 1,957,332 1,135,987 1,934,832 1,082,978 $0.35 $0.34 1,497,049 3,917,879 Flex / R&D 1,311, % 30.3% 27.2% 28.1% 0-13, ,489 $0.73 $ Northwest Warehouse / 5,788, % 18.0% 18.9% 18.9% 4, ,482 4, ,482 $0.47 $ ,651 Manufacturing 1,953, % 13.5% 14.9% 14.9% 4, ,375 4, ,375 $0.56 $ ,000 industrial 7,536, % 15.8% 17.4% 17.4% 29, ,502 29, ,502 $0.48 $ ,651 Flex / R&D 807, % 27.5% 23.2% 23.2% -7,580 14,942-7,580 14,942 $0.65 $ market Warehouse / 185,870, % 12.1% 13.7% 14.3% 2,688,875 3,162,187 2,635,133 3,213,217 $0.43 $0.44 1,786,074 4,808,781 Manufacturing 61,556, % 14.2% 13.6% 15.0% -97, , , ,204 $0.63 $0.59 2,430, ,000 industrial 248,986, % 11.9% 12.8% 13.7% 2,529,498 3,559,426 2,453,256 3,587,956 $0.44 $0.43 4,216,831 5,102,781 Flex / R&D 31,669, % 20.1% 22.2% 23.9% 320, , , ,335 $0.91 $ Vacancy: Physically vacant space. Vacancy includes both direct and sublease space. Availability: Space being marketed for lease by owner or sublessor, regardless of occupancy. Availability includes both direct and sublease space. Net Absorption: The net change in occupancy over a measured period of time. Average Asking Rent: Direct monthly values presented on a NNN basis, then weighted by the amount of direct available space in a building. Statistics reflect the total industrial market, including owner occupied facilities.

12 Jones Lang LaSalle Phoenix Industrial Outlook Q Phoenix industrial buildings with large block availabilities Manufacturing Manufacturing/Flex Manufacturing Manufacturing Northwest 1 Block 545,176 s.f W Union Hills Dr (M/F) 545,176 s.f Southwest 14 Blocks 6,252,136 s.f. Contiguous blocks greater than 250,000 square feet; (M): Manufacturing; (D): ; (F): Flex Airport. 1 Block 285,198 s.f. Buckeye Business Center (D) 697,049 s.f. Honeywell Airlane Campus (M) 285,198 s.f. Fowler Center (D) 682,291 s.f. Liberty Logistics Center I (D) 593,600 s.f. Home Depot (D) 552,330 s.f. ProLogis Park Riverside (D) 486,241 s.f. Cotton Lane Commerce Park (M) 458,839 s.f. ParkSkyway Business Park (D) 418,651 s.f. 43rd Avenue Logistics Center (D) 394,775 s.f. Riverside Industrial Center (D) 376,760 s.f. Coldwater Depot Logistics Center (D) 326,214 s.f W Buckeye Rd (D) 325,800 s.f. Valley West Center II (D) 323,346 s.f West Watkins Street (D) 313,600 s.f. Palo Verde Center (D) 302,640 s.f. Southeast Valley 1 Block 352,415 s.f E Madison (M) 352,415 s.f.

13 Jones Lang LaSalle Phoenix Industrial Outlook Q Phoenix industrial construction map Construction in progress (100,000 s.f.+) 1 FAB 42 (Intel Corporation) 4500 S Dobson Road 2,145,757 s.f. est. delivery Q WinCo Warehouse S 75 th & Durango 800,000 s.f. est. delivery Q Buckeye Business Center 8585 W Buckeye Road 697,049 s.f. est. delivery Q Intel Chandler 5400 W Chandler Blvd 285,000 s.f. est. delivery Q Turner Spectrum Ridge multiple addresses 120,269 s.f. est. delivery Q1, Q MACK Pinnacle 425 E Pinnacle Peak Rd 90,575 s.f. est. delivery Q MACK Pinnacle 525 E Pinnacle Peak Rd 78,281 s.f. est. delivery Q Construction completed Fourth Quarter ParkSkyway N 132 nd Ave 418,651 s.f rd Ave Logistics 1635 S 43 rd Ave 394,775 s.f W Buckeye Rd 325,800 s.f. 4 5 Southwest Products N 132 nd St 164,000 s.f W Morelos Pl 126,251 s.f.

14 Jones Lang LaSalle Phoenix Industrial Outlook Q Phoenix contacts Brokerage Anthony J. Lydon, SIOR, CSCMP Managing Director Brokerage Mark Detmer Managing Director Project & Development Services Chris Carrell Senior Vice President Bill Honsaker Managing Director Bo Mills Managing Director Derek Ruterman Vice President Marc D. Hertzberg, SIOR Managing Director Steve Larsen Vice President Riley Gilbert Associate Pat Harlan Executive Vice President Steve Sayre Executive Vice President Kyle Westfall Associate Research Eli Gilbert Research Manager Matt Kolano Research Analyst

15 About Jones Lang LaSalle Jones Lang LaSalle (NYSE:JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. With annual revenue of $3.9 billion, Jones Lang LaSalle operates in 70 countries from more than 1,000 locations worldwide. On behalf of its clients, the firm provides management and real estate outsourcing services to a property portfolio of 2.6 billion square feet and completed $63 billion in sales, acquisitions and finance transactions in Its investment management business, LaSalle Investment Management, has $46.3 billion of real estate assets under management. For further information, visit Jones Lang LaSalle Research Jones Lang LaSalle s research team delivers intelligence, analysis, and insight through market-leading reports and services that illuminate today s commercial real estate dynamics and identify tomorrow s challenges and opportunities. Our 350 professional researchers track and analyze economic and property trends and forecast future conditions in over 70 countries, producing unrivalled local and global perspectives. Our research and expertise, fueled by real-time information and innovative thinking around the world, creates a competitive advantage for our clients and drives successful strategies and optimal real estate decisions. Jones Lang LaSalle 3131 East Camelback Road Suite 400 Phoenix, AZ tel fax Jones Lang LaSalle IP, Inc. All rights reserved. No part of this publication may be reproduced by any means, whether graphically, electronically, mechanically or otherwise howsoever, including without limitation photocopying and recording on magnetic tape, or included in any information store and/or retrieval system without prior written permission of Jones Lang LaSalle. The information contained in this document has been compiled from sources believed to be reliable. Jones Lang LaSalle or any of their affiliates accept no liability or responsibility for the accuracy or completeness of the information contained herein and no reliance should be placed on the information contained in this document.