The Esplanade

Phoenix office market gains momentum

Source: Lee & Associates Q1 Report

As the overall economy continues improving, the Phoenix office sector is experiencing strong momentum in a variety of different measurements. Office construction, sales velocity and rents are all on the rise; however leasing activity remains muted.

The Valley is flooded with tenants in the market touring buildings and assessing future options. Site Selection magazine recently reported that Phoenix topped all other Pacific and Mountain region cities such as Los Angeles, San Francisco, Seattle, Denver and Salt Lake City in the number of firms choosing what city to relocate to. This is the confidence metric the industry has been searching for. Companies that had remained on hold for the past few years are now hiring and assessing the need for additional space or an improvement in the quality of their space by leaning toward higher-end product.

Another major bright spot in the office sector is construction as it continues to rise in key submarkets such as Chandler, Tempe and the Airport area. With low interest rates and easing financing requirements, some companies are choosing to build rather than lease existing space. This rising figure indicates confidence in the market as developers fill gaps with much sought-after product. Some larger firms are opting to develop their own projects in order to secure the exact space and location they desire.

Leasing activity remains slow due to several factors such as office space job growth remains slow in some sectors and the desire to buy vs. lease The number of months it takes to lease space in the Valley is at its highest level in over 10 years. The Phoenix market has an abundance of high-quality product available that, when sentiment changes, will facilitate an immediate uptake of vacant space.

Vacancy saw a 30-basis point retreat this quarter up to 20.9% even while there was modest net absorption of 241,665 SF. This abnormality is due to the delivery of nearly 400,000 SF of new inventory, two-thirds of which was vacant. With the onslaught of new projects being developed and added to market inventory, vacancy rates will drop more slowly over the next year. The office sector is on a more solid foundation than at any time since mid-2008, but still has a ways to go from the boom days of 2006.

New construction remains strong. As of Q1 2015, new construction posted over 4 million SF of space. Four-fifths of the total is for built-to-suit projects; Notably over 2M SF of space for State Farm’s Marina Heights project under way in Tempe.

Sales activity remains very strong with key assets changing hands at record price per square foot. High-quality Class A space has broken through the $300 per SF mark. Camelback Esplanade III at 2415 E. Camelback Rd., in Phoenix sold this quarter for $74,300,000 or $340.41 per SF. The largest transaction of the quarter is the sale of the University of Phoenix headquarters at 4025 S. Riverpoint Pkwy., in Phoenix for $183 million or $305.17 per SF. The three-building, 599,664 SF deal was sold to EPIC, LLC of New York. The seller was American Realty capital Properties REIT. The space is leased by University of Phoenix.

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