National: Industrial/Manufacturing Sector
Despite inflation pressures (Exhibit A), recession worries, the War in Ukraine, a restrictive Fed, and the ongoing pandemic, the industrial/manufacturing sector continues to show material strength. For the 22nd consecutive month, the ISM Manufacturing report (Exhibit B) in March showed an expansionary market with a headline reading of 57.1. The Industrial Production Index (Exhibit C) which measures real output for all manufacturing, mining, electric, and gas facilities located in the United States has now fully recovered from the output deficit experienced in 2020.
The one data point that seems to have come back to Earth is e-commerce (Exhibit D), but this is a function of people shopping in person more so than what we were seeing during the depths of the COVID pandemic. That said, e-commerce remains elevated as a percent of retail sales compared to the pre-COVID era.
In terms of fundamentals, the market remains strong. According to Real Cap Analytics, industrial property prices rose 28.5 percent year-over-year. That's the highest annual jump on record for any property type for RCA. Despite market volatility, since February 2020, industrial REIT prices are up 60 percent, with FFO up 24 percent in 2021.
Additionally, with vacancy rates at historic lows (Exhibit E), market rents and net absorption (Exhibit
F) across regions continue to break records. According to CoStar, 262 million square feet was leased in Q1, up 2 percent from the previous record for any quarter. Throughout the pandemic, elevated spending and the growth of e-commerce were the driving forces behind this historic support for industrial space. But, with U.S. lockdowns now over, elevated pricing, a slowing economy, and a record construction pipeline, some are getting a bit more cautious about the future of the industrial sector. Adding to this perspective, Amazon announced in February that its pace of growth of logistics space would be slowing after massive growth throughout the pandemic. While we respect these reasons to temper enthusiasm for the industrial sector, we anticipate a continuation of industrial space demand for the foreseeable future, mainly due to the pullback from globalization.
COVID pandemic supply chain issues and the war in Ukraine spooked many industrial space users to move operations onshore. As inflation and supply chain issues continue to worry many, we anticipate a move onshore will save users time and money, protect against future unforeseen events, and keep industrial space demand elevated for the next few years despite any pullback in spending or the economic recovery.
Phoenix: Industrial/Manufacturing Sector
In terms of economic strength, you’d be hard pressed to find a stronger metropolitan area. The Phoenix metropolitan was one of the first major metropolitan areas to fully recover from jobs lost during the pandemic. Additionally, in March, the U.S. Census Bureau reported that Maricopa County was the fastest growing county in the U.S. between July 2020 and July 2021, increasing by 58,246 people. The Case Shiller Home Price Index has Phoenix as the fastest HPA growth rate for all large metros for the 32nd consecutive month and in terms of business, out of the 10 largest counties in the country, Maricopa County was first in establishment growth between September 2020 to September 2021.
The combination of strong demographic and economic trends in Arizona, and the massive support for the industrial sector, has made the Phoenix industrial market substantially strong over the past few years. In terms of e-commerce, roughly 35 million consumers can be reached within a day's drive, and the low cost of doing business, particularly compared to its neighbor to the West, creates a competitive advantage for this region.
In terms of fundamentals, vacancy rates sit around 6 percent (Exhibit G), a bit off their lows, but still well below historic levels. Just like the national average, rental rates have steadily risen over the past decade with the growth of e-commerce, and we expect this trend to continue. Although home to numerous data centers, manufacturing, and logistics companies -- and in addition to the typical players like Amazon -- there have been new entrants into the Phoenix industrial market recently. These include HelloFresh (440,000 sf), MLILY (1.2M sf), and Footprint (113,000 sf). On the manufacturing side, Taiwan Semiconductor and Intel are both breaking ground on large semiconductor manufacturing facilities, which will continue to be projects that receive ample attention over the next couple years.
Given the business-friendly environment, access to consumers, and lower relative cost of the region, we anticipate the Phoenix industrial market will remain attractive for years to come.