Maturing Phoenix Office Market Provides Stability, Opportunities

PHOENIX - Jan. 12, 2017 - PRLog -- The Phoenix office sector finished the year in solid form as the market finds its equilibrium.

Though absorption for the year is down slightly from last, 2016 was the third-largest increase in net absorption in a decade. The pace of new construction is strong, but not overheated, adding to the sense of market maturity after a long slog through the Great Recession. This speaks to the solid market fundamentals present in the Valley to begin with: a young, dynamic workforce, lower cost of doing business, motivated economic development groups and solid population increases. These factors have helped make the Valley's office sector more stable, rather than the perceived boom-or-bust mentality for which Phoenix has been known for decades.

Perceptions and reality are both evolving about the Valley. New energy from out-of-state companies (many from Silicon Valley) have begun to transform the market according to Chris Camacho, CEO of Greater Phoenix Economic Council (GPEC). He sees the region's entrepreneurial ecosystem as thriving. He also says these companies are also changing the Valley's physical infrastructure.

With this newer breed of office user entering the market, it poses challenges and opportunities for landlords and tenants to think creatively about how to best make the best decisions regarding space requirements. Most office users are now planning less square footage per employee. Since 2012, when the average was 225 SF per worker, it is now only 151 SF per person, according to a recent CoreNet Global report. With these lower space requirements, many companies have given back space they no longer require. This means increasing pressure for landlords as more tenants are needed to meet occupancy goals.

Vacancy remained steady at 18.6% from last quarter, but is down 90-basis points from the beginning of the year when vacancy was 19.5%. Over 3.5 million SF of deliveries were added to inventory this year. New construction remained strong as nearly 2.7 million SF is currently under construction. Most new building activity is centered in Tempe, Airport Area and Chandler.

Net absorption posted at 519,391 SF for the quarter and 2.9M SF for 2016.

Asking rents increased by an average of 0.6%. Arrowhead and Paradise Valley submarkets have posted the highest gains. Concessions still remain and tenant improvements continue to be generous in select submarkets. Leasing activity remained in historically modest territory, but is down by a third compared with 2015.

The largest lease transaction of the quarter was ADP leasing 225,000 SF at the former US Airways Operations Center at 111 W. Rio Salado Pkwy., Tempe. The largest sales transaction in Q4 was the sale of Renaissance Square, 2 and 40 N. Central Ave., Phoenix for $151.3M. Price per SF was calculated at $156.65. Both buildings comprise 965,508 SF.

The future of the Valley's office sector appears to be on solid footing. There is stronger than expected population growth, a stable legislative agenda and a modest regulatory climate. These factors appeal to outside firms seeking a new place to call home and the Valley seems to be rolling out the red carpet.

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Lee & Associates Arizona specializes in providing exceptional commercial brokerage services to the industrial, office, investment, multifamily, and land 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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