Warehouses Grow in the Desert as Phoenix Logistics Corridor Expands

Date: Thursday, August 11, 2022
Source: Wall Street Journal

A new warehouse corridor is forming along a desert-lined freeway just outside Phoenix as companies seek alternative paths for distribution into the U.S. away from congested and costly coastal gateways.

Retailers Dick’s Sporting Goods Inc., Recreational Equipment Inc. and online pet-supplies store Chewy Inc. are among those taking up space in the burgeoning logistics hub along Loop 303, an anchor for what has become one of the fastest-growing markets for industrial real estate in the U.S.

Companies through the second quarter had leased a net total of 16 million square feet of industrial space in the Phoenix area, according to real-estate services firm CBRE Group Inc., which tracks a measure known as net absorption, calculated as the amount of new space leased minus the space vacated. That put the Arizona city behind only Chicago and the Dallas-Fort Worth region as the country’s busiest sites for new logistics activity this year.

Another 19.8 million square feet of industrial space is under construction in a Phoenix region that includes the Loop 303 corridor.

he growing logistics activity comes as many retailers and manufacturers are looking to reconfigure their supply chains, both to get closer to the big U.S. consumer markets and to get around the bottlenecks at traditional freight hubs like Southern California’s Inland Empire region.

Phoenix is more than 300 miles from that massive distribution region, and a long freight haul from the ports of Los Angeles and Long Beach. But developers say California’s tight warehousing market, where the vacancy rate has fallen below 1%, and rising leasing rents are changing some of the economic calculations of distribution.

“When you weigh the cost of transportation and trucking, versus the delay of goods coming into the port, it became feasible for retailers to look at putting stuff on a truck and trucking it over to Phoenix, where you have ample space to be able to develop these really big, large logistics facilities,” said Nick Parrish, managing director at private-investment firm Cresset Partners LLC, which is developing industrial buildings in the area.

Logistics operators have been searching for new distribution channels beyond the big traditional hubs to help circumvent supply-chain snarls and major backlogs at the biggest U.S. ports. That has led to growing warehouse construction in areas such as Houston, Salt Lake City and the Upstate region of South Carolina.

hipping through such secondary markets can carry a cost. Phoenix, like other Sunbelt cities, has been growing rapidly, but the metropolitan region’s population of nearly 5 million estimated by the U.S. Census Bureau as of July 2021 pales alongside the enormous local market of some 24 million people in Southern California.

The state highway called Loop 303 was completed in 2017, following an arc on the northwest side of the Phoenix metropolitan area and connecting Interstate 10 on the city’s west side to Interstate 17 to the north. Much of the new industrial development and leasing activity has taken place between Interstate 10 and U.S. 60.

With growing residential communities along the roughly 17-mile stretch, and large expanses of desert and farmland on either side, the highway has become a magnet for warehousing.

“The floodgate opened at that point,” said Pat Feeney, executive vice president in CBRE’s Phoenix office.

Puma SE recently decided to move into a 1 million-square-foot building under construction that may become a major hub for the German sporting goods retailer’s wholesale distribution in the western U.S.

Helmut Leibbrandt, senior vice president of supply-chain management and logistics for the Americas at Puma, said the company considered sites in areas including Las Vegas and the Inland Empire, but settled on Phoenix because of the wide open space and relatively cheap leasing rates.

“They’re building, growing like mushrooms almost in the Phoenix area,” Mr. Leibbrandt said.

Puma has other major distribution facilities in Indianapolis and in Torrance, Calif., which is in between the ports of Los Angeles and Long Beach. The new building won’t replace those, Mr. Leibbrandt said.

Still, freight transportation hasn’t caught up to the warehouse growth.

BNSF Railway Co. and Union Pacific Corp. serve Phoenix, but neither has a direct route to Los Angeles, said Ted Prince, chief strategy officer at transportation company Tiger Cool Express LLC. For both railroads, Phoenix is a turn off from their main routes that target transport to hubs in areas such as Dallas and Houston. That makes trucks the most direct way to get to the area from the West.

When it comes to industrial sites with rail access, “we are in short supply of that right now,” said Mr. Feeney.



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