National: Industrial/Manufacturing Sector
With the economy and global markets in flux over restrictive Fed's policies, rising rates, and ongoing inflation pressures, the U.S. industrial sector has begun to show signs of softening. Despite this slowing, the industrial sector remains well supported by consumer spending, the continued growth of e-commerce, and renewed motivation by U.S. producers to bring supply chains back onshore. As an example of recent onshoring activities, of Apple's 180 suppliers, 48 now have manufacturing sites in the U.S. as of September 2021, up from only 20 in September 2020. On a national level, onshoring is expected to create a total of 350,000 jobs in the U.S. In 2022.
Overall, economic data related to the industrial sector continues to post positive numbers; For the 28th consecutive month, the ISM Manufacturing Report in September showed an expansionary market with a reading of 50.9, but the trend has been weakening over the past few months (Exhibit A). The Industrial Production Index (Exhibit B), which measures real output for all manufacturing, mining, electric and gas facilities located in the United States, is back above 104 for the first time since 2018. And finally, e-commerce as a percent of retail sales remains elevated compared to its pre-COVID trend and currently stands at 14.5 percent (Exhibit C).
In terms of real estate fundamentals, most data points continue to show strength with vacancy rates still near historic lows around 4 percent, market rents (Exhibit D) continuing to trend upwards and net absorption (Exhibit E) across most regions steadily in positive territory.
Although economic and fundamental data are mostly positive, there are some areas of concern when you factor in elevated construction starts (Exhibit E) with consumer spending worries surrounding a possible upcoming recession. Regardless, we anticipate a continuation of healthy industrial space demand for the foreseeable future, mainly due to the long-term growth of e-commerce and the recent pullback from globalization in terms of supply chain dynamics.
Phoenix: Industrial/Manufacturing Sector
The Phoenix market continues to be one of the stronger markets in terms of demographics. Population growth continues to outpace the rest of the country, and with an ongoing attractive relative cost of living and quality of life, the Valley looks set to generate steady population growth for years to come. On the economic front, according to the Arizona Commerce Authority, despite challenges surrounding the pandemic, over the past five years, Arizona generated over 100,000 net new jobs, $54 billion in capital investment, and average wages grew by about 15 percent.
The industrial sector in Phoenix remains particularly attractive due to the strength in demographic and economic trends, lower cost in relation to California, and proximity to millions of consumers within a day's drive.
In terms of fundamentals, vacancy rates sit around 4 percent (Exhibit F), and just like the national average, rental rates have steadily risen over the past decade with the growth of e-commerce.
One area that is worth monitoring continues to be industrial construction starts across the Valley, which currently sits in record territory despite much of the space built without a tenant in place (Exhibit G). Developers are targeting areas outside of Goodyear and Glendale where land is cheaper, with massive industrial parks underway along the Loop 303 freeway. In the East Valley, a number of projects are also underway near the Phoenix-Mesa Gateway Airport area including Gateway Grand, the Cubes at Mesa Gateway, Gateway 202, and Power 202 Logistics.
As for demand for Phoenix industrial space by industry, manufacturing and logistics continue to support the area but the Valley has become a strong data center market as well. In Arizona, data centers benefit from tax incentives, limited risk for natural disasters, and a robust power grid.
Regarding tenants planting their flag In the Valley, TSMC's $12 billion semiconductor manufacturing plant continues to receive much of the attention, but we've witnessed a number of other large institutions committing to the Phoenix MSA over the past few months as well. These Include:
Despite fears over a deep recession and elevated construction levels, we feel strongly that the tailwinds supporting the Phoenix industrial market are strong enough to not only outperform most markets, but even in a mild recession scenario, we would expect the sector to continue to trend positively in terms of both fundamentals and economics.