Steady Pace Fuels Confidence in Phoenix Office Market

PHOENIX - Jan. 21, 2014 - PRLog -- The Valley office market continued its modest resurgence during the fourth quarter and is expected to make greater progress in 2014. The year began with vacancy at 150-basis points higher than at year end, seven straight quarters of positive net absorption and steady, if not stellar leasing activity. Major projects were announced including State Farm’s new regional corporate campus and USA Place, both in Downtown Tempe. New construction has increased considerably from Q1 2013 which consisted of a lone flex office space under construction in Chandler.

The return of a more reliable economic picture including a growing GDP, a higher employment rate and a resolution to Washington gridlock on budget issues has instilled modest confidence with investors. With banks more willing to lend again, owners are able to invest in updating their properties to better compete as an increase in rental rates is expected during 2014. Lending for new projects, which had been dormant for a long time, has begun to take shape with mostly build-to-suits and some spec projects with a marquee tenant in tow.

The Phoenix office market concluded 2013 by posting a Q4 vacancy rate of 23.2%, a modest 30-basis point drop from Q3. Vacancy rates have not been this low since Q1 2009 when the recession hit bottom. Since that time, except for a few quarters where there was a minor retreat, the Phoenix office market has progressed steadily and consistently without the wild swings found in other sectors.

Net absorption for the quarter posted a positive 506,386 SF. This is slightly below last quarter; however, posting a positive 1.28M SF for the year. The Camelback Corridor showed the highest absorption this quarter with the 44th Street Corridor having the most negative absorption for the quarter. Buildings under construction totaled 642,823 SF and included several build-to-suit projects such as General Motors at 170,000 SF and GoDaddy at 150,001 SF to the latest phase of Skysong (III) at 145,000 SF and the all spec Allred Park Place Central, Building 4 at 100,622 SF. There were no building completions added to market inventory this quarter and only 246,999 SF for the year.

Rental rates continued to inch up and posted an average asking rate of $20.66 per SF, a 0.3% increase over last quarter. Average rental rates are now back to what they were in Q4 2011. Lease activity ended the quarter at 1.6M SF. Activity has remained very consistent in number of deals transacted each quarter for some time. However, lease size has consistently decreased due to corporate downsizing. As the economy improves, this trend is expected to improve somewhat, while many feel these changes could be permanent as business learns to live with less space. The largest lease transaction for the quarter was for Matric Absence Management which leased 68,554 SF at Desert Canyon Corporate Campus, 2421 W. Peoria Ave. in Phoenix.

Sales activity was lower this quarter posting $277M compared with a revised $390M sold last quarter. The largest sales transaction of the quarter was the $57.5M sale of 100 E. University Dr. in

Tempe. Brookfi eld Property Group was the seller while JP Morgan Chase was the buyer.

The inevitable rise in the Phoenix office sector was expected; however, it still has a long way to go to break through to a sub-20% vacancy rate. With an increased level of activity and minimal building, the market inventory will tighten at a quicker pace. Many commercial real estate experts have pointed to a resurgent Phoenix office market with the same conviction as they pronounced its demise just a few years back. The answer is most likely somewhere in-between. That’s a good place to be considering where this

sector was a few short years ago.