There is new optimism in the office market as the sector is exhibiting positive vacancy, absorption, rental rates and sales velocity. Office had been the slowest commercial sector to recover and is finally showing signs of accelerated growth.
Though vacancy rates remain historically high, there has been a steady trend downward over the past year by over 400 basis points. With only four properties added to the inventory in the past 18 months, stronger than expected absorption has been chipping away at vacancy rates. As a result, many have predicted that the office sector will be hitting on all cylinders in 2014-2015.
“Overbuilding worries from the past decade have been revived with con- struction talk again,” said Matt DePinto, senior research analyst with Lee & Associates Arizona. “This time experts believe that the new projects will be developed in submarkets that are lacking quality Class A product with large contiguous blocks of space.”
To this point, several large projects have been proposed in both Phoenix and Tempe downtowns.
The Ryan Companies US, Inc., and Sunbelt Holdings announced they will develop a 2 MSF mixed-use project estimated to cost $600M at Tempe Town Lake called Marina Heights. It will also house the new regional headquarters for State Farm Insurance as well as office, retail and recreational spaces.
Additionally, the Hayden Ferry Lakeside development adjacent to Marina Heights, is planning a new, 260,000 SF office tower to join the other two towers. Other submarkets with stronger Class A absorption over the past year such as Downtown Phoenix, have also garnered interest with developers who are in initial planning stages for several high rise buildings, including one by Barron Collier & Co.
The office market posted a 23.7% vacancy rate, down only 10 basis points, but still moving in the right direction. In fact, office vacancy is now at its lowest level since Q1 2009. Absorption has risen by 290,166 SF this quarter, more than double last quarter’s total. However, since Q1 2009 absorption has only risen by 1.42M.
One building was delivered to market this quarter. Aetna Insurance leased 139,403 SF at Liberty Cotton Center, 4500 E. Cotton Center Blvd. in Phoenix. The 68,867 SF building at 1340 S. Spectrum Blvd. in Chandler is the only office building under construction in the Phoenix market again this quarter.
Rental rates rose by nearly 2% to $20.43 per square foot from last quarter and posted its highest level since Q1 2012. Lease activity is up by total number of transactions this period, but down in overall SF by nearly 200,000 SF. The largest lease transaction signed this quarter was for General Motors taking 169,998 SF at the still proposed Chandler Freeway Crossing II, 2800 W. Geronimo Pl., Chandler. Move in is expected in April 2014.
Sales volume increased dramatically this quarter to $227M in total transactions compared with only $49.7M last quarter. The number of transactions also increased from 52 to 93.
The largest sales transaction for the quarter was the JDM Partners, LLC purchase of the 5-building State Farm Insurance property at 2900 S. Sunland Dr in Chandler. The sale/ leaseback transaction was for $73M consisting of four office and one flex industrial building. The 333,437 SF office portion of the sale was allocated at $66.097M. Price per square foot was calculated at $218.93.
