Industrial Market Closes 2017 on an Upswing

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1 Research & Forecast Report GREATER PHOENIX INDUSTRIAL Industrial Market Closes on an Upswing Key Takeaways > > The Greater Phoenix industrial market finished off a year of robust tenant demand with a strong fourth quarter. The outlook for 2018 calls for continued improvement. > > Net absorption topped 2.1 million square feet in the fourth quarter, bringing the total for the year to approximately 9.2 million square feet. The vacancy rate has retreated 140 basis points in the past 12 months, ending at 8 percent. > > Asking rents inched down a bit in the fourth quarter, ending the year at $0.57 per square foot, per month. Asking rents rose 2.2 percent in, after stronger gains in and. > > Approximately 1.2 million square feet of new space came online during the fourth quarter, bringing the total construction for to more than 5.6 million square feet. Construction activity has remained consistent in recent years, averaging 5.5 million square feet annually since > > The investment market was active in. Sales velocity rose by more than 15 percent from levels, the median price rose to $83 per square foot, and cap rates compressed to about 7 percent. Greater Phoenix Industrial Market The Greater Phoenix industrial market closed out one of the most active years on record with a strong fourth quarter. The market has settled into a pattern where net absorption routinely tops 1 million square feet per quarter, and in, the figure for the full year was more than 9 million square feet. Absorption has been fueled by large tenant move-ins, led by UPS, Conair and Huhtamaki North America. Market Indicators Relative to prior period Net Absorption Construction Rental Rate Fourth Quarter Economic Trends* Phoenix Metro Employment Phoenix Industrial Uses Employment U.S. Employment U.S. Industrial Uses Employment *Source: Bureau of Labor Statistics Summary Statistics Phoenix Industrial Market Rate 8.0% Change from (bps) -140 Net Absorption (thousands SF) 2,146 New Construction (thousands SF) 1,230 Under Construction (millions SF) Asking Rents Per Square Foot Per Month Market $0.57 Change from 2.2% Market

2 Greater Phoenix Industrial Market (continued) Looking ahead to 2018, the trend of large tenant moves is likely to continue. Several large leases have been signed that will support activity levels in the first few months of Late in, online retailer Chewy.com announced plans to move into an 800,000-square foot build-to-suit facility in Goodyear. The facility will likely be delivered late in the year, and the company plans to have as many as 750 employees working in the facility. Investors are responding to the strong operating conditions by aggressively acquiring properties. Sales velocity rose by 10 percent in the fourth quarter, and for the year transaction activity spiked by more than 15 percent. This momentum is pushing prices higher and compressing cap rates. In, the average cap rate dipped to 7 percent, while several properties changed hands with cap rates at 6 percent or below. Recent Transactions in the Market SALE ACTIVITY Property Address Submarket Sale Date Sale Price Size SF Sale Price SF Class 7200 W Buckeye Rd., Phoenix Southwest 12/5 $31,200, ,000 $78 A 6877 & 6971 E Frye Rd., Chandler Southeast 12/28 $26,500, ,714 $163 A 844 N 47th Ave., Phoenix Southwest 12/26 $16,850, ,981 $64 B LEASE ACTIVITY Property Address Submarket Tenant Size SF 143rd Ave & Van Buren St., Goodyear Goodyear Chewy.com 800, E Germann Rd., Gilbert Chandler Airport Footprint Manufacturing 131, N 75th Ave., Phoenix Tolleson Aspen Home 82,832 Historical Absorption, Deliveries and Rates 10,000, ,000,000 1 Square Feet 6,000,000 4,000,000 2,000,000 - (2,000,000) 14% 12% 4% (4,000,000) 2% (6,000,000) % * Forecast Net Absorption Deliveries 2 Greater Phoenix Research & Forecast Report Industrial Colliers International

3 : by Building Type > > Industrial vacancy declined in each quarter in, ending the year at 8 percent. The rate fell 30 basis points during the fourth quarter, and is 140 basis points lower than at the end of. This is the lowest industrial vacancy rate in the market in more than 10 years. 20% % Warehouse Manufacturing Flex > > The Airport Area submarket recorded the most significant vacancy decline in, as some of the recent spec construction was leased up. in the Airport Area dropped 320 basis points in the past 12 months, ending at 9.7 percent. 12% > > in the Southwest Valley fell 250 basis points in, reaching 8.4 percent in the fourth quarter. This marked the fourth consecutive year where vacancy improved in the Southwest Valley. 4% 2% 0% 2013 > > Forecast: Following a vacancy improvement of more than 100 basis points in, the local vacancy rate is forecast to decline at a more modest pace in in Greater Phoenix is expected to dip to approximately 7.5 percent in the year ahead. Absorption and Leasing Activity: > > Net absorption totaled approximately 2.1 million square feet during the fourth quarter, bringing the total for the year to more than 9.2 million square feet. This was the fourth time in the past five quarters where net absorption topped 2 million square feet. > > Net absorption in the Southwest Valley topped 1 million square feet during the fourth quarter. In, net absorption in the Southwest Valley reached nearly 5 million square feet, up from 3.2 million square feet in. > > Two significant tenant move-ins drove net absorption in the Northwest Valley in the second half of this year. Conair moved into more than 800,000 square feet during the third quarter, and UPS moved into more than 600,000 square feet in the fourth quarter. Net absorption in the Northwest Valley totaled nearly 2 million square feet in. > > Forecast: After recording the strongest annual total in more than a decade in, net absorption is forecast to retreat a bit to approximately 7 million square feet in Net absorption has averaged 6.6 million square feet per year since Among Major Submarkets 14% 12% 4% 2% 0% Asking Rent Trends Rental Rates: > > Asking rents dipped slightly in the fourth quarter, ending the year at approximately $0.57 per square foot, per month. Despite the drop to close the year, asking rents are up 2.2 percent during the past 12 months. > > The leveling-off in rental rates was highlighted in the big-box distribution segment of the market. Asking rents in these buildings were essentially flat in, ending the year at $0.41 per square foot, per month. Asking rents in big-box distribution space rose an average of more than 7 percent per year in and. Average Asking Rent (per SF, per month) $0.58 $0.57 $0.56 $0.55 $0.54 $0.53 $0.52 $0.51 $0.50 $0.49 $0.48 $0.47 $0.46 $ Greater Phoenix Research & Forecast Report Industrial Colliers International

4 Rental Rates (continued): > > While rents were flat for much of across most segments of the market, the Southwest Valley proved to be the exception. Strong tenant demand for space in the Southwest Valley and a tightening vacancy rate drove rents up 9.2 percent in the past year to $0.40 per square foot, per month. > > Forecast: Rents will likely increase by about 3 percent in Some of the spec projects that are under construction are being marketed at the higher end of the rent spectrum. If these buildings lease up fairly quickly, it could provide a boost to rents in existing properties. Construction: Construction Employment Overview Construciton Jobs (thousands) Construction Employment Employment Change * * Through November 10.0% 7.5% 5.0% 2.5% 0.0% -2.5% -5.0% Annual Change > > Greater Phoenix has been in an active, but consistent industrial construction cycle. In, approximately 5.6 million square feet was delivered, up slightly from the total. Since 2013, industrial construction has averaged 5.5 million square feet per year. > > Projects totaling more than 5.2 million square feet are currently under construction in the Greater Phoenix industrial market. This is nearly identical to the amount of space under construction one year ago. > > The West Valley will be the site of the bulk of the industrial construction to come to the market in the years ahead. Projects totaling more than 3 million square feet are under construction or planned along the Loop 303, while 3.2 million square feet is under construction in the Southwest Valley. > > Forecast: New construction is forecast to total approximately 6.5 million square feet in 2018, outpacing the totals for the past few years. Construction is ramping up in response to continued tenant demand for space. Investment Trends: Construction Trends by Submarket Square Feet 2018* 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000, ,000 - Airport Area Northeast Valley Northwest Valley Southeast Valley Southwest Valley * Forecast Investment Trends Sales Price Cap Rate $100 > > Sales of industrial buildings closed on an upswing, rising 13 percent from the total recorded during the third quarter. Sales velocity was up 16 percent in compared to levels. More buildings sold in than in any year since > > After spiking in the third quarter, the median price in the fourth quarter dipped back to $83 per square foot. The median price for all of was also $83 per square foot, up nearly 15 percent from the median price. > > Cap rates compressed in, particularly in the second half of the year. The average cap rate during the fourth quarter was in the mid-6 percent range. For the year, the average cap rate was approximately 7 percent, down 30 basis points from the average. Median Price per SF $80 $60 $40 $20 $ % 7% 5% Average Cap Rate 4 Greater Phoenix Research & Forecast Report Industrial Colliers International

5 Industrial Market EXISTING PROPERTIES DIRECT VACANCY SUBLEASE VACANCY TOTAL VACANCY NET ABSORPTION - SF NEW SUPPLY - SF UNDER CONSTR AVG. RENT BUILDING TYPE TOTAL INVENTORY SF SF RATE SF RATE SF RATE -17 RATE -16 CURRENT PERIOD YTD CURRENT PERIOD YTD SF RATE (NNN) INDUSTRIAL MARKET Airport Market Cluster: North Airport, S Airport N of Roeser, S Airport S of Roeser, SC N of Salt River, SC S of Salt River General Industrial 6,431,328 1,321, % - 0.0% 1,321, % , ,940-68,220 - $0.62 Warehouse 25,065,893 1,843, % 69, % 1,912, % 260, , , ,001 - $0.66 Manufacturing 8,441, , % 83, % 353, % 9.9% 84, ,631-23,008 - $0.48 Service Center/Showroom 1,556,611 33, % - 0.0% 33, % 3.1% 0 15, $0.75 Flex 4,163, , , % 786, % 23.1% 49, , $1.07 Total 45,658,641 4,250, % 157, % 4,407, % 12.9% 436,943 1,788, , ,229 - $0.69 Northeast Market Cluster: Central Phoenix, Scottsdale Airpark, Scottsdale/Salt River General Industrial 637,618 59, % - 0.0% 59, % 7.7% 12,870 (10,069) $0.93 Warehouse 5,343, , % 45, , % 22,719 39, ,160 - $0.90 Manufacturing 2,912,537 82, % 82, % (1,195) 3, $0.85 Service Center/Showroom 1,008,250 34, % - 0.0% 34, % 5.3% 9,418 19, $1.14 Flex 4,390, , % 4, % 403, % 8.3% (47,242) (37,329) $1.09 Total 14,291, , , % 997, % 6.1% (3,430) 14, ,160 - $1.00 Northwest Market Cluster: Deer Valley/Pinnacle Peak, Glendale, Grand Avenue, N Glendale/Sun City, North Black Canyon, North Outlying, W Phx N of Thomas, W Phx S of Thomas General Industrial 8,936, , % 586, % 12.2% 689,787 1,768,201 11,482 1,442, ,485 $0.44 Warehouse 28,491,646 1,718, % 69, % 1,788, % 5. 21, , , , ,014 $0.51 Manufacturing 11,166, , % 4, % 500, % 3.2% (16,159) (75,222) - 66,612 - $0.64 Service Center/Showroom 1,975,905 61, % 1, % 63, % 1.7% (22,754) (29,857) $0.59 Flex 4,593, , % 356, % 21,568 97, $0.85 Total 55,164,520 3,218, % 75, % 3,294, % 6.4% 693,836 1,922, ,738 1,813,862 1,115,499 $0.56 Southeast Market Cluster: Chandler Airport, Chandler, Chandler N/Gilbert, Falcon Field/Apache Junction, Mesa, Tempe East, Tempe Northwest, Tempe Southwest General Industrial 10,769,534 1,180, % - 0.0% 1,180, % 9. (58,507) (137,250) 11, ,672 $0.56 Warehouse 36,322,448 2,727, , % 2,817, % 65, , , , ,600 $0.60 Manufacturing 21,580, , % 383, ,026, % 15, , , ,000 $0.69 Service Center/Showroom 2,950,388 73, % 20, % 93, % 3. (7,393) 15, $0.77 Flex 11,875,226 1,577, % 93, ,671, % 13.4% (26,121) (77,200) $1.07 Total 83,498,447 6,203, % 586, % 6,790, % 8.3% (10,668) 641, , , ,272 $0.71 Southwest Market Cluster: Goodyear, SW N of Buckeye Road, SW S Buckeye Road, Tolleson, Southwest Outlying General Industrial 47,783,884 4,566, , % 4,669, ,040 3,080,835-1,971,567 2,929,080 $0.37 Warehouse 33,026,958 2,454, % 15, % 2,469, % 8.7% 383, , , , ,340 $0.39 Manufacturing 10,792, , % - 0.0% 720, % 11.5% 245, , , ,000 - $0.40 Service Center/Showroom 2,494,091 42, % - 0.0% 42, % 1.9% 42,272 4, $0.52 Flex 1,246, , % % 124, % 17.3% (775) 91, $0.71 Total 95,343,514 7,908, % 118, % 8,026, % 10.9% 1,029,705 4,875, ,349 2,821,916 3,204,420 $0.40 GRAND TOTAL General Industrial 74,558,595 7,714, % 102, % 7,817, % 13.3% 1,046,364 5,139,657 11,482 3,493,706 3,427,237 $0.44 Warehouse 128,250,405 9,116, % 289, % 9,405, % 7.9% 753,506 2,277, ,014 1,575,514 1,358,954 $0.53 Manufacturing 54,894,482 2,212, % 471, % 2,684, % ,826 1,551, , , ,000 $0.67 Service Center/Showroom 9,985, , % 21, % 267, % 2.9% 21,543 23, $0.86 Flex 26,268,329 3,238, % 103, % 3,341, % 13.7% (2,853) 250, $1.06 Total 293,957,056 22,528, % 988, % 23,517, % 9.4% 2,146,386 9,242,792 1,230,496 5,638,819 5,236,191 $0.57 QUARTERLY COMPARISON AND TOTALS Q4-17 Total 293,957,056 22,528, % 988, % 23,517, % 9.4% 2,146,386 9,242,792 1,230,496 5,638,819 5,236,191 $0.57 Q3-17 Total 292,581,150 23,677, % 747, % 24,424, % 2,665,152 1,953,721 5,108,645 $0.57 Q2-17 Total 290,627,429 24,361, % 774, % 25,135, ,237, ,320 6,048,240 $0.56 Q1-17 Total 289,970,109 24,649, % 1,067, % 25,716, % 3,166,638 1,797,282 5,287,690 $0.56 Q4-16 Total 288,172,827 25,645, % 1,440, % 27,085, % 2,496,901 1,010,577 5,542,530 $0.56 As new, corrected or updated information is obtained, it is incorporated in both current and historical data, which may invalidate comparison to previously issued reports.

6 Outlook: There was a great deal of momentum in the Greater Phoenix industrial market in, with tenants taking large blocks of space, development continuing at a healthy pace and vacancies tightening. This momentum is forecast to be sustained in The year is poised for a strong start, with tenants having already committed to approximately 1 million square feet of move-ins scheduled for the first quarter of With businesses continuing to expand in the Greater Phoenix area, net absorption is forecast to remain strong. With vacancy now at a 10-year low, development of new industrial space is forecast to gain momentum in Construction activity picked up beginning in 2013, and the combined vacancy rates in buildings delivered since 2013 have retreated into the low-20 percent range. As new buildings come online, there could be a few short-term upticks in the vacancy rate, but the demand present in the marketplace should be sufficient to push the overall rate down a bit in The strong property performance and the optimistic outlook will continue to support investment activity in the year ahead. More properties are changing hands at higher prices and lower cap rates, which should encourage more properties to be listed for sale. Once again, the year comes to a close with expectations for rising interest rates in the year ahead, and while rates have inched higher during the past 18 months, this has done little to slow the pace of investment activity in the local industrial market. FOR MORE INFORMATION Bob Mulhern Senior Managing Director Greater Phoenix Bob.Mulhern@colliers.com Jim Keeley SIOR Founding Partner Scottsdale Office Jim.Keeley@colliers.com Pete O Neil Research Director Greater Phoenix Pete.ONeil@colliers.com Copyright 2018 Colliers International. The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report. Colliers International Greater Phoenix 2390 E. Camelback Road, Suite 100 Phoenix, AZ colliers.com/greaterphoenix 6 North American Research & Forecast Report Q4 Office Market Outlook Colliers International