The industrial market in Phoenix is no longer one market. It's two — and they're moving in opposite directions.
Big-box distribution (100,000+ sf) has softened meaningfully. Vacancy in the Southwest Valley logistics corridor has pushed above 12%, concessions are creeping in, and rental rates on spec product have flattened. The narrative that drove 50 million square feet of speculative development between 2021 and 2024 has cooled.
Small-bay flex (5,000–30,000 sf), on the other hand, is tighter than it's been in a decade. Vacancy is under 4% in most infill submarkets. Rents are at all-time highs. And there's almost no new supply coming.
Why small-bay is outperforming
The demand drivers for small-bay industrial are fundamentally different from big-box:
- Tenant diversity. Small-bay serves HVAC contractors, auto parts distributors, e-commerce fulfillment, specialty food producers, and trades businesses. These tenants are local, growing, and not subject to the same demand swings as national logistics operators.
- No new supply. Small-bay is expensive to build on a per-square-foot basis ($140–$170/sf vs. $90–$110/sf for big-box) and land in infill locations is scarce. Developers can't justify the construction cost basis at current rents in most submarkets, which keeps supply constrained.
- Sticky tenants. A plumbing contractor who builds out a 7,500 sf bay with a showroom, parts storage, and dispatch office isn't moving for a $0.15/sf rent increase. Retention rates on small-bay product run 80–85%, compared to 60–70% for big-box.
- Rent premium. Small-bay product in Phoenix is leasing at $12–$16/sf NNN, compared to $7–$9/sf NNN for big-box. On a per-square-foot basis, small-bay generates 50–80% more rent.
The investment case
Small-bay industrial trades at 5.75–6.75% cap rates in the Phoenix metro — a premium to big-box, but justified by higher rent growth, lower vacancy, and better tenant retention. The value-add play is straightforward: buy an older multi-tenant flex complex, upgrade the common areas and loading infrastructure, mark rents to market, and hold.
The capital stack is clean. Banks are comfortable with small-bay industrial at 65–70% LTV. No rate caps needed. No bridge required. Stabilized day-one cash flow with organic rent growth of 3–5% annually.
What's happening in big-box
The big-box correction is real but not catastrophic. What's happening is a normalization from an overbuilt cycle, not a structural decline in demand. Phoenix still has strong logistics fundamentals — proximity to LA ports, labor availability, land cost advantage over California.
But the near-term math is painful for developers who delivered spec product in 2024–2025. Lease-up timelines have stretched from 6 months to 18+ months. Concessions (free rent, TI allowances) are eating into first-year NOI. And some projects are trading at or below replacement cost.
For buyers, that creates opportunity — if you're patient enough to absorb 12–18 months of lease-up and confident in the long-term logistics thesis.
Our take
If you're allocating capital to industrial in Phoenix today, we'd weight heavily toward small-bay. The risk-adjusted return is better, the tenancy is more stable, and the supply picture is structurally constrained in a way that big-box is not.
We're financing and advising on industrial transactions across both segments. Whether you're buying a 10-bay flex complex or looking at a 200,000 sf distribution center, we'll underwrite it and tell you what we think.