Lee & Associates | Q3 2014 Phoenix Office & Industrial Market Conditions

By: Lee & Associates
 
PHOENIX - Oct. 13, 2014 - PRLog -- Phoenix Office Market

The Phoenix office market ended the third quarter in a very strong position. After a bold first quarter and a less than stellar second quarter, the sector is heading toward the end of the year with sustainable momentum moving into 2015. Economic conditions including a growing GDP and higher employment, are translating to increased market activity and growth in the office sector.

The Valley’s office market is humming with build-to-suit construction projects, mostly in the East Valley. In Downtown Tempe, tower cranes dot Tempe Town Lake. The biggest project of them all, State Farm’s Marina Heights, is currently under construction of its first phase that includes two mid-rises totaling over 1 million SF. Additional phases will bring the project to over 2M SF and will become the largest office project in Arizona. In addition to Marina Heights, Hayden Ferry Lakeside is under construction with a 10-story, 250,000 SF building on Tempe Town Lake. This is the third and final phase of this office project.

Another very active submarket is Chandler. This sector is becoming a first choice for tech companies and many are locating along the Loop 101/202 Corridor. There have been many land sales over the past year with new office projects planned. With 700,000 SF of current construction activity and nearly 300,000 SF delivered so far in 2014, this sector continues to see strong momentum going forward.

Absorption continues in positive territory and is up substantially over Q2. Net absorption posted a 798,563 SF gain. Year-to-date, net absorption stands at 1.8M SF. Lease activity remains strong as a steady stream of tenants are in the market looking for quality space. Certain sectors are providing challenges with availability, forcing tenants to consider other options. Overall market vacancy has dropped an additional 20-basis points to 21.6%, the lowest level since Q3 2008 at the beginning of the Great Recession. Since then, over 6.5M SF of office space has been added to the Phoenix office inventory.

Full-service asking rents remain below historic levels, but are increasing modestly each quarter. In Q3, lease rates increased overall by 1.3%, with Class A rents rising the most by 3.2%.

Construction activity remains strong, especially in Tempe and Chandler. A total of 2.25M SF of office space is currently under construction in the Valley. Three projects totaling 574,262 SF were delivered to inventory this quarter.

In the largest lease transaction this quarter, Concentrix Corp. leased 101,803 SF at Fountainhead Office Plaza in Tempe. The largest sales transaction in Q3 was Washington Alliance Capital’s purchase of the 53,314 SF offices for the U.S. Immigration Service at 1330 S. 16th St. for $17.6M or $330.12 per SF.

The Phoenix office market continues to rebuild and reposition itself as a strengthening economy brings new opportunities for growth. The sector is becoming stronger with new fundamentals in place that will guide the market forward.

Phoenix Industrial Market

The Phoenix industrial sector continues to move ahead at a steady pace as an improving market has set the stage for new opportunities. Businesses looking to relocate or expand are finding fewer available options each quarter. Developers are beginning to address these shortcomings as speculative development is growing.

As inventory continues to age, there are a rising number of properties that are becoming functionally obsolete. Many tenants expect more modern amenities and functionality that older buildings can’t provide. As a result, build-to-suit projects have increased over the past few years for larger users who are willing to spend more to be in the right space.

Over the past 18 months, a lagging Valley housing market and an uneven economy with cautious consumers slowed the activity of smaller tenants in the market. However, the trend seems to be shifting as increased activity has been reported among smaller users. Now, new spec projects are growing in submarkets with tight inventories such as Deer Valley and Sky Harbor Airport. These new properties, mostly multi-tenant buildings that are geared toward the small user, are filling in submarkets that offered fewer and outdated choices.

The Valley industrial market posted a vacancy rate of 12.1%, a 50-basis point drop over last quarter. Net absorption remains positive at 1,265,010 SF, but is down sharply from last quarter’s 3.8M SF. The sector is expected to absorb approximately 7 million SF of space by year’s end.

Overall rental rates have remained flat while the Southeast Valley (which includes the red-hot Chandler and Tempe submarkets) has posted an increase of 6.1% over last quarter’s figures.

Construction activity remains strong at 3.7M SF and is up by over 1.5M SF over last quarter. Activity is spread over most submarkets except for the Northeast Valley, which has no current construction underway. Deliveries to inventory this quarter totaled 684,108 SF and over 5.3M SF for the year.

The largest lease transaction for the quarter was Green Light Direct, which took 73,781 SF of warehouse space at 8601 W. Washington St. in Tolleson. Leasing activity remains steady, but off from last quarter’s total. The largest sales transaction was Griffin Opportunities’ purchase of the 102,996 SF flex R & D property at 2851 W. Kathleen Rd. in Phoenix for $23,000,000. Price per SF was reported at $209.72.

The Phoenix industrial market has weathered many obstacles over the past 5 years and will no doubt be tested from time to time as economic conditions determine this sector’s success. However, the Valley’s industrial market seems to be on the right path toward sustained growth moving through 2015 as the economy continues to pick up steam.

About Us
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.

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Matt DePinto
mdepinto@leearizona.com
602-474-9512
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Source:Lee & Associates
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Tags:Commercial Real Estate, Office, Industrial, Arizona, Real Estate
Industry:Real Estate
Location:Phoenix - Arizona - United States
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