In a Phoenix office market already experiencing its fourth consecutive year of annual absorption gains, landmark deals like the recent five-building Marina Heights – State Farm campus in Downtown Tempe are expected to have an additional top-down impact, spurring even more interest in local Class A and Trophy office assets, according to the Q4 2017 JLL Phoenix Office Market Insight report.
This marks the fourth straight calendar year with at least 2.0 million square feet of positive absorption gains, the longest streak of its kind ever recorded in the Phoenix office market. Relative to average annual absorption gains of 1.4 million square feet since 1999, these past few years have been exceptional, with asking rate growth, declining vacancy and sales activity to match.
Highlights:
•2017 marks the fourth consecutive year of annual absorption gains totaling 2.0 million SF or more
•State Farm’s 5-building campus in Tempe sold for $928 million, the largest sale in state history
•Although the pace of growth is slowing, the market has not yet peaked
Although the pace of growth is slowing, JLL data indicates that the Valley has not yet peaked. The volume of tenants still in the market – currently encompassing 62 active requirements representing 3.5 million square feet of space – suggest there is still room to grow, even if users must get creative with the options currently available.
“The State Farm campus and Downtown Tempe area are a nice welcome to Phoenix as you fly into Sky Harbor International Airport,” said JLL Senior Managing Director Dennis Desmond. “The fact that State Farm chose to build this campus off Tempe Town Lake solidifies the area as a central business district of Tempe and further solidifies that market as an economic force in Metro Phoenix.”
The five-building, 2.0-million-square-foot Marina Heights project serves as a regional hub for State Farm. It was sold in December 2017 for $928 million, making it the largest office sale in Arizona history and positioning Tempe as the most in-demand office submarket this cycle.
“The sale is an equally strong testament to the robust investment interest that Metro Phoenix is seeing from institutional buyers,” added JLL Senior Vice President Tivon Moffitt. “We expect this sale will spur even more interest from institutional buyers, which will create more opportunities for Arizona-based capital firms to invest in significant trophy assets valley-wide, as was the case with State Farm.”
With the State Farm boost now in the rearview, the market seems to be returning to “normal.” Vacancy is still declining, but has fallen only 30 basis points since year-end 2016, compared to at least 140-bps the prior three years. Annual rate growth has similarly slowed. However, the volume of tenants still in the market suggests there is still plenty of room to grow before the market peaks, even if users are forced to get creative with the options currently available.
Outlook
Some of the tightest submarkets outside of the Southeast have seen little to no new supply, and just a few large blocks of space remain. Rates in these submarkets have begun escalating quickly, even as growth in the overall market slows. With total vacancy still well above the national average of 15.0 percent, Phoenix is not approaching its peak as quickly as other markets, but more in-demand submarkets will see leverage shift sooner than others.
