Ted Simons: Reports are mixed but most studies seem to show the local economy is in the upswing. We check on industrial real estate market in Phoenix and see how the world of warehouses and manufacturing plants is shaping up. Here to talk about his company's new report on the valley's industrial real estate market is Anthony Lydon of Jones-Lang-Lasalle, a financial services firm. Good to have you here.
Anthony Lydon: thanks, Ted. Great to be here.
Ted Simons: this is the kind of stuff people think they know about real estate but that's usually homes and such. This is industrial real estate. What is the state of the valley's market?
Anthony Lydon: The state of the valley's market somewhat of a mixed bag. The parts of the valley are starting recovery but clearly we have been challenged as it relates to the sequestration cuts, lack of new housing, housing is a direct link to GDP for our area, other issues of that nature. We have had a robust amount of design-build, corporate design-build projects so we're turning the corner.
Ted Simons: before we get further on this, define industrial market.
Anthony Lydon: Sure. Phoenix has about million square feet of industrial space. Our industrial market really came about as a defensive strategy by our country in World War II where they wanted to move some of the manufacturing plants inland away from the coast lean. So it's been rather remarkable the amount of industrial real estate over the last years it's roughly a million square foot annual creation of space. We're basically the same size as many Midwest and east coast markets that are to years old and we're or years old.
Ted Simons: sounds like the warehouse and distribution space, that aspect, doing the best?
Anthony Lydon: Actually not.
Ted Simons: Not doing the best.
Anthony Lydon: that's challenged right now. The large warehouse. The big box warehouse is on the demand side. That's for a few of the reasons we mentioned. Where we're seeing increased activity, our scalable specialized facilities that corporations chose Arizona for versus any other state in the country.
Ted Simons: When we see the apple plant, stories behind that, is that expected to boost numbers?
Anthony Lydon: Absolutely. Apple is a big deal. It's the only United States manufacturing plant they have. That's going to generate ancillary companies into the valley that's going to create more jobs.
Ted Simons: So if warehouse and distribution space not doing that well does that mean manufacturing might be doing a little bit better of?
Anthony Lydon: Starting to come around but based on sequestration cuts, housing -- corporate America for better or for worse has a lack of confidence from a regulatory standpoint with respect to the government decisions and so forth. Those sorts of things are putting a damper on it, but I would say compared to other markets in the country, Phoenix is very well positioned.
Ted Simons: As far as vacancy rates, what are you seeing?
Anthony Lydon: Over all vacancy now is just shy of %. The national rate is eight. We're % higher than the national. Don't fret. When Phoenix comes back we come back fairly strong. We average a little less than million square feet annual absorption. We missed that slightly last year, but again we're averaging two to . million square feet of corporate employer build.
Ted Simons: Intel is vacant. Does that affect the rates?
Anthony Lydon: Not directly. That affects jobs. I think Intel, I'm not going to speak for them but they have some of the smartest people in the planet that work for that company.
Ted Simons: my point is once that facility they figure out what to do with it, vacancy rates should improve.
Anthony Lydon: correct. That is a sizable -- Yes. when you have million feet vacant --
Ted Simons: Are we seeing more, smaller projects?
Antony Lydon: When I use scalable I'm referring to larger employees,, feet or larger. On the smaller to mid size general industrial marketplace, which is really our backbone of our economy, it's not on the front page but very important, we are seeing improvement in the southeast valley, deer valley, the Sky Harbor sub markets. There all seeing increase in activity. We're seeing early signs of increased demand in corporate occupiers in the west valley.
Ted Simons: in temperatures of the space are we different than other markets?
Anthony Lydon: No. Every market will cater to their larger users. I will say, though, Phoenix now has relatively large facilities that many other markets in the country would die for. So on a larger size we truly have some scalable , square foot regional food user, building right now marshal's just completed a distribution center. These are larger buildings. Tier cities like Los Angeles, Dallas, Chicago have. It's unusual to find buildings of that size in our market.
Ted Simons: you mentioned southwest valley, deer valley. Where is most of the development going and is therein full or -- infill or --
Anthony Lydon: Our markets matured there are infill opportunities specifically in the Sky Harbor and central Phoenix marketplace. Very difficult to source them. So get to get appropriate zoning you may have environmental damage on the property.
Ted Simons: pricing demands, demand trends, the whole nine yards. Where are we going? Are we going this way or are we static?
Anthony Lydon: We're in a very good position. Geographically, Phoenix sits within the triangle of California, the world's eighth largest economy, Mexico, which is soon to become the world's number one manufacturer, and the th largest economy of the world, and Texas, the th largest economy. Within that we're the fourth largest trade partner with Mexico. We need to be as competitive as we can be because the corporate employers are typically having states compete against one another for their business.
Ted Simons: I was going to ask about that. What are they looking for when they look at an industrial real estate market?
Anthony Lydon: Total cost of operation. That includes real estate taxes. Our taxes tends to be higher than many other markets in the country. That's an area where we can improve. They are also looking for a deep qualified work force. We need to continue to invest in high-tech knowledge industrial education system through our universities as well as the low tech manufacturing technology entities like our community colleges and other schools in the area.
Ted Simons: At the state legislature there's much effort to try to entice from California and elsewhere businesses to come to Arizona. That a promise as yet waiting to see fulfilled?
Anthony Lydon: It's actually happening. We work closely with the Arizona commerce authority and greater Phoenix economic area as well as local development teams. We're tracking larger corporate requirements on the industrial side and a third to % are California companies that may not be closing their California operation but any expansion outside of California we want that business.
Ted Simons: the state of the valley's industrial real estate market, give us an overview.
Anthony Lydon: The state right now is a mixed bag. We think that we're probably to months away from a stabilized residential marketplace which is going to bootstrap all of the markets and different product types. We remain a very attractive location for many industrial corporate employers.
Ted Simons: sounds like optimism.
Anthony Lydon: great place to be.
Ted Simons: thanks for joining us.
Anthony Lydon: Thank you, Ted.