Phoenix Office Market Continues March Toward Stronger Balance

PHOENIX - Oct. 15, 2015 - PRLog -- The Phoenix office market had a strong showing in Q3, posting the highest absorption in six quarters. The sector is still faced with a 20-plus percent vacancy; however, increasing net absorption has helped bring it down from over 27 percent a few short years ago. Additionally, built up demand for new construction, both spec and built-to-suit, continues to distort inventory just enough to slow vacancy progress. Still, it has been a strong turnaround with still plenty more growth yet to be seen.

Prior to the Great Recession, the Phoenix office sector was extremely overbuilt from the last boom cycle. Arizona’s entire real estate market collapsed including the housing market. The Phoenix market at that point had sunk lower (with the exception of Las Vegas), than any other market in the country. "It is a testament to this market’s strong fundamentals that we’ve recovered to this point, said Matt DePinto, Senior Research Analyst with Lee & Associates. "Conditions have greatly improved, but not at an unsustainable pace."

Vacancy improved by 60-basis points to 20.2%. Net absorption showed a strong improvement from Q2 15 with an increase of 848,073 SF and a nearly 1.5 million increase in year-to-date absorption.

Office construction activity remains brisk but at reasonable levels. A total of 4,172,745 SF of buildings are under construction—2.1 million of that is for one project—State Farm’s Marina Heights campus in Tempe. Even though construction activity has continued to increase it is by no means close to the pre-recession levels when over 11M SF of office product was developed between 2006 and 2008. This quarter, there were two new buildings delivered to inventory totaling 400,000 SF this quarter. Year-to-date total deliveries are 2,085,626 SF.

Asking rental rate growth has shown positive improvement throughout the market. Overall rates increased 3.1% from last quarter. Only five the of 28 office submarkets showed decreasing asking rental rates in a sign that landlords are finally confident in raising rents and are offering fewer concessions than they have been in recent years.

Leasing activity continued at a moderate pace. In the largest transaction of Q3, Santander Bank leased 140,000 SF at the newly renovated Centrica building at 1550 W. Southern Ave., Mesa. The property was reconfigured from a retail big box store.

The largest sales transaction was the ViaWest purchase of the 3-building, 635,002 SF Biltmore Financial Center at 2390-2398 E. Camelback Rd., Phoenix for $163,100,000 or $256.85 per SF.

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Lee & Associates Arizona specializes in providing exceptional commercial brokerage services to the industrial, office, land and investment sectors of the Phoenix commercial real estate market. The Phoenix office was established in 1991 and is now recognized as one of the most successful brokerage firms in the state. Each of our nationwide Lee & Associates offices has a strong local ownership combined with a powerful platform from the national Lee & Associates network.