Research & Forecast Report

ARIZONA | INDUSTRIAL2Q 2019

2Q: Great ExpectationsKey Takeaways > Not only does Greater Phoenix continue to lead the country in job creation, it also remains #1 for population growth (three years running). During the 12-month period ending in May, preliminary estimates show that employers added 66,500 net new jobs, an increase of 3.2 percent which places Greater Phoenix #1 in overall job growth for the country.

> According to the BLS (Bureau of Labor Statistics), over-the-year nonfarm employment rose in 29 of the 51 metropolitan areas with a 2010 Census population of 1 million or more, while employment was essentially unchanged in 22 areas. The largest over-the-year percentage increases in employment in these large metropolitan areas occurred in Phoenix-Mesa-Scottsdale, AZ (+3.2 percent), Orlando-Kissimmee-Sanford, FL (+3.1 percent), and Dallas-Fort Worth-Arlington, TX, and Las Vegas-Henderson-Paradise, NV (+2.9 percent each).

> Net absorption, which was 550,000 in the first quarter, increased to approximately 1.4 million by the end of the second. Under construction projects also increased to 8.9 million square feet with rents up 2 percent over-the-year to $0.57 per square foot.

> Development of new industrial space remains quite active particularly in the Southeast (2.8 million square feet) and Southwest (4.5 million square feet) portions of the Valley. As a result, new construction is putting upward pressure on vacancy which has witnessed minor 10 to 40 basis point increases over-the-quarter, specifically in warehouse and manufacturing subtypes. Nonetheless, vacancy across all submarket clusters remains well below 10 percent, with minor deviations by type.

> In the second quarter, while number of transactions increased to 72, sales volume decreased 12 percent over-the-quarter, 5 percent over-the-year, to $312 million. The median price settled at $96 per square foot which is below 1Q’s $104, the

Summary Statistics Phoenix Industrial Market

Vacancy Rate 6.8%

Change from 2Q 2018 (bps) -50

Net Absorption (thousands SF) 1,420

New Construction (thousands SF) 1,655

Under Construction (millions SF) 8,954

Asking Rents Per Square Foot Per Month

$0.57

Change from 2Q 2018 1.8%

Market IndicatorsRelative to prior period

Market2Q 2019

Market 2Q 2018

Vacancy

Net Absorption

Construction

Rental Rate — Second Quarter Economic Trends*

Phoenix Metro Employment

Phoenix Industrial Uses Employment

U.S. Employment

U.S. Industrial Uses Employment

*Source: Bureau of Labor Statistics

2 Arizona Research & Forecast Report | 2Q 2019 | Industrial | Colliers International2

second highest over the last several years, but below 3Q 2017’s $106 high. Cap rates continued to compress decreasing 23 basis points (bps) over-the-year to 6.77 percent.

Greater Phoenix Industrial Market

Whereas net absorption witnessed a mild slowdown in the first quarter, over-the-quarter absorption spiked nearly 160 percent to 1.4 million, but below 2Q 2018’s 2.3 million square feet. The vacancy rate in the second quarter continued to decrease to a cyclical low of 6.8 percent, with manufacturing hitting 3.6 percent its second lowest recording since 4Q’s 3.4 percent. Industrial vacancy, overall, has been trending in the low- to mid-7 percent range since the end of 2017 and is a significant improvement from double-digit rates as recently as 2015.

Development activity ramped up to 8.9 million square feet to meet persistent demand in the market. Approximately 3 million square feet of new space has been delivered over the first half of 2019. Since 2Q 2018, roughly 10 million square feet has come online. As previously noted, despite consistently high deliveries vacancy rates continue to contract.

Investment conditions improved in both over-the-quarter and year numbers. While many of the trends were still positive, they did lag the fast-paced levels from early 2018. Industrial building sales volume decreased over-the-year with median price per SF continuing to remain elevated at $96 and cap rates settling at 6.77 percent.

SALE ACTIVITY

Property Address Submarket Sale Date Sale Price Size SF Sale Price SF Class

8681 W Washington St (Part of Portfolio) Tolleson 4/12 $29,830,000 118,123 $253 B

19019 N 59th Ave, Honeywell Surprise 4/17 $26,500,000 252,300 $105 B

600 E Curry Rd Tempe Northwest 5/29 $18,000,000 99,597 $181 B

Recent Transactions in the Market

LEASE ACTIVITY

Property Address Submarket Tenant Size SF

13351 W Rioglass Solar Rd., Surprise Glendale National Indoor RV Center 170,625

901 S 86th Ave., Tolleson Tolleson Walmart 121,895

777 S 67th Ave., Phoenix SW N of Buckeye Road United Foods International 109,620

Key Takeaways (continued)

Historical Absorption, Deliveries and Vacancy Rates

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2010 2011 2012 2013 2014 2015 2016 2017 2018 1H '19 2019*

Vacancy

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Net Absorption Deliveries Vacancy* Forecast

3 Arizona Research & Forecast Report | 2Q 2019 | Industrial | Colliers International

Vacancy: > The Greater Phoenix industrial vacancy rate remained flat over-the-year. Over-the-quarter, however, vacancy decreased 40 bps to 6.8 percent. Nearly all submarket clusters witnessed decreases in vacancy aside from the Southwest Valley which rose 170 bps, over-the-year, to 8.6 percent with nearly 2 million square feet coming online since the beginning of the year. The Northeast and Northwest Valley saw the lowest vacancy readings at 3.5 percent and 5.3 percent respectively with both the Airport Area (6.6 percent) and Southeast Valley (6.5 percent) continue to remain at, or near, cyclical lows.

> Forecast: With a handful of large space projects slated to come online in the following quarters, vacancy is expected to creep higher by the end of the year and is forecast to end 2019 at, or near, 8 percent.

Absorption and Leasing Activity: > While net absorption weakened during the first quarter to 550,000 square feet, second quarter absorption levels spiked to 1.4 million across all industrial types. Valley-area distribution, warehouse and flex space saw the highest net absorption through the first half of 2019 at 1.1 million, 479K and 353K respectively.

> New lease activity was lead by National Indoor RV Center’s 170,625 square foot lease of 13351 W Rioglass Solar Rd in Surprise and Walmart’s 121,895 square foot lease of 901 S 86th Ave building in the Tolleson Ind submarket. Also of note, was United Foods International’s 109,620 square foot lease of the 777 S 67th Ave building in the Southwest Valley.

> Forecast: Net absorption is forecast to reach approximately 6.3 million square feet in 2019, lagging the amount of new construction in the market.

Rental Rates: > Asking rents were up nearly 2 percent over-the-year, and flat over-the-quarter, reaching $0.57 per square foot. Rents in big-box distribution buildings continue to rise at a faster clip than the market-as-a-whole. Asking rents in big-box distribution spaces have risen by 6.7 percent in the past 12 months, reaching $0.41 per square foot in the second quarter.

> Following years of robust absorption levels, the Southwest Valley is recording strong rent growth. Average asking rents in the Southwest Valley ended the second quarter at $0.40 per square foot, up 5.3 percent from one year ago.

> Forecast: Rents should continue to push higher with tenant demand for space strong and newer, more expensive product coming to market. Asking rents are forecast to rise by approximately 3.0-3.5 percent in 2019.

Construction: > Approximately 8.9 million square feet of industrial space is currently under construction, up from second quarter 2018’s 5.9 million square feet. The continued high levels of tenant demand will continue to fuel new construction projects in the coming quarters. Deliveries for Greater Phoenix totaled nearly 11 million square feet since 1Q 2018 and have

Vacancy by Building Type

Asking Rent Trends

Vacancy Among Major Submarkets

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3Q2014

1Q2015

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Vaca

ncy

Warehouse Manufacturing Flex

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Northeast Valley NorthwestValley

Southeast Valley Airport Area Greater Phoenix SouthwestValley

Vaca

ncy

2Q 2019 2Q 2018

$0.46

$0.47

$0.48

$0.49

$0.50

$0.51

$0.52

$0.53

$0.54

$0.55

$0.56

$0.57

$0.58

$0.59

$0.60

1Q2015

2Q 3Q 4Q 1Q2016

2Q 3Q 4Q 1Q2017

2Q 3Q 4Q 1Q2018

2Q 3Q 4Q 1Q2019

2Q

Aver

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Aski

ng R

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SF, p

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)

44 Arizona Research & Forecast Report | 2Q 2019 | Industrial | Colliers International

averaged a little over 6.1 million square feet per year since 2013.

> Forecast: Completions of industrial space will continue to accelerate with estimated delivery of 7.5 million square feet by the end of 2019. As more spec development comes on line over the next several quarters, vacancy is expected to increase to 8 percent by the end of the year.

Investment Trends: > Although below first half 2018’s sale volume high of $812 million, first half 2019 sales are the second highest at $667 million. Despite the decrease in sales volume, number of transactions increased to 72, up from 1Q 2019’s 60 transaction amount and 2Q 2018’s 65 transactions.

> The median price settled at $96 per square foot which is the third highest over the last several years but below third quarter 2017’s $106 high. Cap rates continued to compress decreasing 23 bps over-the-year to 6.77 percent, but 5 bps higher than 1Q 2019’s 6.72 percent.

Construction (continued): Construction Employment Overview

Investment Trends

Construction Trends by Submarket

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Construction Employment Employment Change

* Through May

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2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2Q 2019

Average Cap Rate

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Sales Price Cap Rate

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Airport Area NortheastValley

NorthwestValley

SoutheastValley

SouthwestValley

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2016 2017 2018 2019

Industrial MarketEXISTING 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

2Q-19RATE2Q-18

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 995,113 41,671 4.2% - 0.0% 41,671 4.2% 5.3% 0 9,632 - - - $0.79

Distribution 6,686,624 1,393,971 20.8% - 0.0% 1,393,971 20.8% 18.6% (22,284) 34,972 554,874 554,874 - $0.58

Warehouse 25,230,042 1,078,395 4.3% 42,747 0.2% 1,121,142 4.4% 5.3% 164,099 98,322 115,354 115,354 - $0.55

Manufacturing 8,544,074 98,557 1.2% - 0.0% 98,557 1.2% 2.6% 39,768 92,745 - - - $0.60

Service Center/Showroom 1,933,878 9,669 0.5% - 0.0% 9,669 0.5% 3.9% 19,896 (37,204) - - - $0.75

Flex 2,566,606 347,652 13.5% - 0.0% 347,652 13.5% 20.0% 2,662 128,429 - - - $1.17

Total 45,956,337 2,969,915 6.5% 42,747 0.1% 3,012,662 6.6% 7.7% 204,141 326,896 670,228 670,228 - $0.66

Northeast Market Cluster: Central Phoenix, Scottsdale Airpark, Scottsdale/Salt River

General Industrial 434,527 34,521 7.9% - 0.0% 34,521 7.9% 6.8% 0 (7,372) - - - $1.03

Distribution 620,709 9,294 1.5% 12,388 2.0% 21,682 3.5% 7.0% 12,153 (348) - - - $1.00

Warehouse 5,316,772 152,205 2.9% 18,020 0.3% 170,225 3.2% 6.1% 15,572 37,597 - - - $0.83

Manufacturing 3,770,407 52,097 1.4% 3,945 0.1% 56,042 1.5% 2.9% 3,979 4,610 - - - $0.87

Service Center/Showroom 1,964,179 128,255 6.5% 3,496 0.2% 131,751 6.7% 9.9% (7,075) 792 - - - $1.26

Flex 1,853,132 70,167 3.8% 0 0.0% 70,167 3.8% 6.8% 26,995 (18,986) - - 37,839 $1.08

Total 13,959,726 446,539 3.2% 37,849 0.3% 484,388 3.5% 5.9% 51,624 16,293 - - 37,839 $1.02

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 1,505,279 65,564 4.4% - 0.0% 65,564 4.4% 5.9% (25,691) (8,453) - - 183,149 $0.93

Distribution 8,719,482 275,000 3.2% - 0.0% 275,000 3.2% 5.2% 150,978 259,266 273,357 - $0.46

Warehouse 30,133,098 1,887,567 6.3% 19,970 0.1% 1,907,537 6.3% 9.2% 136,505 (2,644) 19,980 - 407,535 $0.60

Manufacturing 13,336,984 624,239 4.7% - 0.0% 624,239 4.7% 4.5% 178,926 32,564 160,000 160,000 981,998 $0.58

Service Center/Showroom 2,393,160 79,101 3.3% 36,016 1.5% 115,117 4.8% 2.7% (46,036) (45,025) - - - $0.74

Flex 1,722,007 63,154 3.7% - 0.0% 63,154 3.7% 5.3% 9,680 27,669 - - - $0.78

Total 57,810,010 2,994,625 5.2% 55,986 0.1% 3,050,611 5.3% 7.1% 404,362 263,377 179,980 433,357 1,572,682 $0.60

Southeast Market Cluster: Chandler Airport, Chandler, Chandler N/Gilbert, Falcon Field/Apache Junction, Mesa, Tempe East, Tempe Northwest, Tempe Southwest

General Industrial 2,547,764 223,112 8.8% 2,500 0.1% 225,612 8.9% 11.4% 2,530 2,530 - - 511,529 $0.88

Distribution 8,782,871 660,373 7.5% 55,455 0.6% 715,828 8.2% 9.3% 120,919 120,919 - - 496,900 $0.60

Warehouse 38,517,976 3,221,944 8.4% 190,937 0.5% 3,412,881 8.9% 7.1% 8,885 8,885 22,000 22,000 466,392 $0.62

Manufacturing 27,016,319 993,706 3.7% 108,443 0.4% 1,102,149 4.1% 4.7% (226,373) (226,373) - - 1,090,516 $0.76

Service Center/Showroom 3,985,457 384,142 9.6% 5,384 0.1% 389,526 9.8% 10.3% (28,365) (28,365) 10,000 10,000 - $1.19

Flex 5,108,983 463,494 9.1% 5,958 0.1% 469,452 9.2% 11.0% 54,703 54,703 - - - $1.29

Total 85,959,370 5,946,771 6.9% 368,677 0.4% 6,315,448 7.3% 7.1% (67,701) (67,701) 32,000 32,000 2,565,337 $0.73

Southwest Market Cluster: Goodyear, SW N of Buckeye Road, SW S Buckeye Road, Tolleson, Southwest Outlying

General Industrial 3,055,466 0 0.0% 0 0.0% - 0.0% 0.3% 10,800 14,798 - - 103,108 $0.75

Distribution 48,141,222 3,622,765 7.5% 490,532 1.0% 4,113,297 8.5% 9.0% (85,210) 622,036 700,223 1,800,223 3,099,750 $0.40

Warehouse 35,386,340 4,185,903 11.8% 1,000 0.0% 4,186,903 11.8% 6.1% 226,505 93,997 - - 405,656 $0.42

Manufacturing 10,661,745 182,858 1.7% 123,375 1.2% 306,233 2.9% 2.5% 23,330 74,951 - - 941,268 $0.39

Service Center/Showroom 2,610,386 24,402 0.9% - 0.0% 24,402 0.9% 1.8% 4,894 11,761 - - - $0.84

Flex 486,433 0 0.0% - 0.0% - 0.0% 12.7% 60,000 60,000 - - - $0.65

Total 100,341,592 8,015,928 8.0% 614,907 0.6% 8,630,835 8.6% 6.9% 240,319 877,543 700,223 1,800,223 4,549,782 $0.41

GRAND TOTAL

General Industrial 8,476,085 369,494 4.4% 1,894 0.0% 371,388 4.4% 7.2% (18,911) 7,115 - - 762,877 $0.91

Distribution 72,885,893 5,862,822 8.0% 542,920 0.7% 6,405,742 8.8% 10.3% 154,218 1,135,426 1,255,097 2,628,454 3,934,530 $0.44

Warehouse 134,603,070 10,120,741 7.5% 327,391 0.2% 10,448,132 7.8% 6.7% 786,009 479,485 239,863 241,883 1,140,482 $0.54

Manufacturing 63,419,261 1,961,172 3.1% 332,820 0.5% 2,293,992 3.6% 4.0% 183,646 (83,860) 160,000 160,000 3,078,782 $0.63

Service Center/Showroom 12,845,418 470,344 3.7% 49,301 0.4% 519,645 4.0% 5.9% 115,018 45,298 - 10,000 - $1.11

Flex 11,597,682 750,876 6.5% 5,958 0.1% 756,834 6.5% 12.0% 200,308 352,786 - - 37,839 $1.19

Total 303,827,409 19,535,449 6.4% 1,260,284 0.4% 20,795,733 6.8% 6.8% 1,420,288 1,936,250 1,654,960 3,040,337 8,954,510 $0.57

QUARTERLY COMPARISON AND TOTALS

Q2-19 Total 303,827,409 21,471,510 6.4% 1,260,284 0.4% 20,795,733 6.8% 6.8% 1,420,288 1,936,250 1,654,960 3,040,337 8,954,510 $0.57

Q1-19 Total 302,746,634 21,471,510 7.0% 631,791 0.2% 21,907,803 7.2% 549,353 1,405,357 7,267,965 $0.57

Q4-18 Total 304,434,922 21,471,510 7.3% 500,375 0.2% 22,695,769 7.5% 2,346,519 3,516,911 5,406,439 $0.56

Q3-18 Total 298,182,945 21,471,510 7.2% 499,698 0.2% 21,971,208 7.4% 879,675 1,508,834 5,063,472 $0.55

Q2-18 Total 296,674,111 20,625,030 7.0% 576,877 2.0% 21,201,907 7.2% 2,535,022 2,121,015 5,960,775 $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 North American Research & Forecast Report | Q4 2014 | Office Market Outlook | Colliers International

Copyright © 2019 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.

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FOR MORE INFORMATIONBob MulhernSenior Managing Director | Arizona+1 602 222 5038 Bob.Mulhern@colliers.com

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Founding Partner | Scottsdale Office+1 480 655 3300 Jim.Keeley@colliers.com

Thomas BrophyResearch Director | Arizona+1 602 222 5066Thomas.Brophy@colliers.com

Outlook: The outlook for the Greater Phoenix industrial market continues to remain bullish in both the near-to-medium term. Absorption climbed higher while the vacancy rate continued its march downward to 6.8 percent with tenant demand continuing to remain very healthy. The Greater Phoenix area continues to attract industrial businesses, and the infrastructure investment of the Loop 202 extension to connect the Southeast Valley to the West Valley will make transporting goods into and through the Greater Phoenix area far less time consuming.

On a macro level, in January, as a result of substantial market volatility at the end of 2018, not only did Chairman Powell reverse course on Fed balance sheet reductions, he, as well as other Fed governors, decided to stop ongoing interest rate increases leaving

rates at 2.5 percent. In July, Powell et al reiterated their dovish stance by including the possibility of rate cuts in the near term, this sent stocks soaring, both Nasdaq and S&P 500 hit all-time highs with 2Y Treasury yields loosing (8.5) bps.

The net result, markets remained robust for most of the second quarter and the drag on real estate prices many were expecting, as a result of rising rates, has not materialized. With a more dovish Fed, and more talk of QE 4 (Quantitative Easing), expect elevated demand for commercial real estate assets to continue, especially as yields continue to plummet (particularly across fixed income instruments a la Treasury notes) and as investor need for cash flowing vehicles, due in large part to changing demographics, continues to rise.

Airport Market

Northeast Market

Northwest Market

Southeast Market

Southwest Market