BREAKING DOWN THE PHOENIX IOS MARKET WITH MAX SCHUMACHER AT R&G

Max, who are the largest IOS owners/buyers targeting Phoenix?

The majority of the IOS owners in PHX are owner/users. This is followed by former owner/users who have since leased the property when they sold their business or leased the property to another business once they retired. Currently, investors, whether institutional or private, lag these two other groups.

INVESTORS

Prior to 2020, there were essentially zero institutional groups chasing this type of product. You had some smaller, private investors buying one off deals, and some REITs were buying stabilized product, but the bulk of activity was coming from users. Around late 2019, we saw one of the first value-add purchases from an institutional buyer and from there the flood gates really opened up.

The feeding frenzy with institutional buyers continued until about April of 2022 and then a lot of institutional and value-add groups started to pull back. With that said, they were still active and buying, but their return expectations had shifted dramatically. Prior to these interest rate hikes, many of these groups preferred buying vacant or doing shorter-term leaseback deals so they could mark-to-market quicker but when things got “spooky” they were looking for more secure cash flow as opposed to opportunistic upside.

USERS

During this same time period and up until today, users have held strong and are accounting for the bulk of transactions. We have not seen any slowdown on deals under $5M and pricing has remained constant from the peak.

We brought a few sub $5M deals out in the last 12 weeks that were priced in line with comps from ~12 months ago and we were able to tie up all of these deals within 95% of asking price within 1-2 weeks of hitting the market and avoided re-trades on deals.

Above $5M, things have slowed down a bit and one could argue there has been a slight dip in pricing and demand but nothing to write home about.

How is leasing demand?

Frankly, leasing demand is the strongest it has ever been. Prior to the interest rate hikes, over 50% of the inquiries we would receive on a site for lease would be something like “would they sell?”

Many users and tenants during the zero interest rate environment had no interest in leasing, and it was pretty difficult to move product. Since the hikes, we have seen a huge uptick in leasing activity and it feels like we are setting new comps every 12 weeks or so.

In 2020, we were about $3,000 per acre and as of June 2023, we are seeing most deals transact north of $5,500 per acre for pure laydown spaces without buildings and sites with structures are seeing deals get done closer to $7,500 per acre or more.

Which submarkets show the most IOS activity?

Traditionally, Southwest Phoenix has been the “IOS Submarket”. This is essentially the area south of the I-10 from 16^th St to 91^st Ave. Within this submarket, Lower Buckeye Rd from 19^th Ave to 51^st Ave is one of the more active corridors.

West Broadway Rd from 7^th Ave to 51^st Ave also has quite a few good pockets but most of this product is more geared towards auto salvage yards which many institutional buyers tend to shy away from. There are a handful of other pockets within this submarket that are also noteworthy.

Outside of Southwest Phoenix, there are some large, institutionally owned sites in the Grand Ave submarket which benefits from the BNSF Intermodal Facility. There are some really great sites in this submarket but it is not as accessible as the SW PHX submarket so you are not able to push rates as much over there.

Other noteworthy submarkets are Deer Valley and the Southeast Valley which includes Chandler, Tempe, Mesa, and Gilbert.

Deer Valley is arguably one of the most expensive land submarkets in terms of both IOS land and developable industrial land due to the new TSMC plant at the northern end of the submarket. Many of the IOS sites are only in the 1-3 acre range so there are only a few opportunities for institutional buyers.

The Southeast Valley, especially Chandler and Gilbert, are ripe with IOS sites. Many new-to-market IOS groups focus in the I-10 corridor/SW PHX due to its proximity to the Southern California markets and do not pay much attention to the SE Valley. With that said, there have been a handful of trades in the SE Valley since 2020 and pricing out there is higher than the SW Valley.

How have higher lease rates impacted local tenants?

The majority of IOS tenants are leasing from either the former owner of the company who retained ownership of the property or from a mom-and-pop landlord. Often times they are significantly below market and are sticker shocked when their lease comes up for renewal and they get hit with a 2-3x increase on their lease. We have seen a handful of mom-and-pop small business go out of business or relocate to the far west or east valley because of this.

Our advice to tenants is to secure a long term lease from the beginning. Many of these tenants think that a short term lease or a month to month lease benefits them until the property is sold or the landlord decides it is time to raise rents.

What IOS type is most lacking (truck terminal, contractor yards, cross-dock, etc)?

We have very few truck terminals and cross-dock facilities compared to other major IOS markets. This is due to our distance from our ports compared to the other major logistics markets.

Our most bountiful IOS product type is contractor’s yards with or without an office and/or shop. Those with offices and/or shops are of course in much more demand than those without.

Our most in demand product type are ISF (Industrial Service Facility) sites. These generally consist of a functional 5,000 SF+ shop or warehouse building with at least 1-2 acres of excess land. We recently sold a 30,000 SF building on 3.2 acres to an institutional IOS buyer and then brought the property to the market for lease and the demand was overwhelming.

There is a serious lack of functional warehouse/shop buildings with excess land. The key here is functionality…many of the credit tenants are looking for 18’+ clear height, multiple oversized grade level doors, heavy power, and great truck maneuverability. Much of the “shop” product in Phoenix does not fit this description so these are diamonds in the rough.

Are there any particular amenities or features that IOS users are craving in Phoenix?

Like I touched on earlier, 5,000-20,000 SF shop buildings on 1-3 acre of land seem to be the most in demand currently. These types of assets are getting leased in 8-12 weeks of hitting the market and many are setting high water mark comps.

What is the tenant mix between national users versus local?

We are seeing more and more national tenants as local tenants get priced out of the market. With that said, it is also somewhat submarket specific. For example, in Deer Valley we see many more local users and local tenants versus Southwest Phoenix where there is a larger share of national users and national tenants.

Want to search IOS for sale or for lease?