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Phoenix Office Market Strives to Regain Traction After Strong Year-End Showing

 

The Phoenix office market has been making steady gains during the past two quarters and was the last commercial real estate sector to rise from the Great Recession, according to research by Lee & Associate’s Matt DePinto.

Continuation at that pace into 2013 was expected by many experts. Although the Phoenix office sector is still posting some positive data, both demand for space and the lack of office sector jobs (due in part to lingering concerns about the economy such as the government sequester), have slowed considerably.

On a positive note, vacancy is down and absorption is up for four straight quarters. Office product is back on a more healthy footing as foreclosures and short-sales have become an increasingly smaller percentage of the overall market. Additionally, the Phoenix economy is growing again due mostly to the rebounding housing market.

Conversely, office leasing activity is at its lowest level since Q2 2009 as market forces seemingly conspire against the office sector.

“Just when the news appears positive, a government-created sequester begins which will result in across the board cuts to government agencies and will directly impact the demand for office space,” said DePinto, Senior Research Analyst at Lee & Associates Arizona. “The effect of the sequester is expected to multiply as the year progresses as government offices and providers to the Fed scale back.”

Asking rental rates are down in 17 of 28 Valley office submarkets, compared with just 9 in the last quarter. Sales transactions are down 50% and are only one-tenth the dollar value of last quarter. Typically, there is a rush to complete deals by year end which in turn short-changes the first quarter of the following year. However, the first quarter drop this year was considerable. As for specific building types, medical office continues to flourish as other property types are still lagging.

The office sector posted a 23.8% vacancy rate, down 20-basis points from last quarter. Net absorption was down from last quarter’s impressive showing but still managed a respectable 125,322 SF. In fact; it is the highest absorption total for a first quarter since Q1 2007. The Camelback Corridor posted the highest absorption at 146,168 SF, while the Scottsdale Airpark produced the most negative absorption at 165,416 SF.

Construction activity remains low with just one 68,867 SF, Class A building under development by the Douglas Allred Company at 1340 S. Spectrum Blvd., Chandler. Because of continued limited new construction activity, there were no properties delivered to market this quarter. However, speculation that several high-rise properties will begin construction within the year in a few tight Class A submarkets such as Downtown Phoenix and Tempe.

Rental rates showed a much larger drop this quarter losing 1.5% from last quarter. Overall average asking rental rates settled at $20.05 PSF.

The largest lease transaction this quarter was at Metro Tech Center, 8900 N. 22nd Ave., Phoenix as Vangent, Inc. renewed its 124,552 SF lease. The largest single sales transaction for the quarter was the Presson Corp. purchase of the 14-building Scottsdale Executive Plaza, 6220 E. Thomas Rd., Scottsdale for $6.25M. Price per square foot was calculated at $38.89. Sales activity at $49.7M is at the lowest level since Q3 2010.

REIT’s were the number one buyer type in the market at 49.4% this quarter compared with only 4.3% last quarter. Regional and national individual investors were the leading buyers in Q4 2012.

Players in the Valley office sector remain cautious and look to 2014-2015 as the real recovery period for the market. Still, there are many bargains to be had, attractive lease options to be signed and signature properties to be purchased.

As in the past, the Valley economy will rise again, adding to the consternation of our tendency toward boom and bust cycles in this market. We’re not booming yet in the office sector, but that may come sometime in the next few years.