Employment growth fuels demand for more office space in Phoenix

Real Estate | 5 Oct, 2018 |

Greater Phoenix posted a strong third quarter in the office space sector, though net absorption dipped from the robust levels of the second quarter.  Strong job creation is fueling tenant demand for office space and motivating developers to start new projects.

Net absorption during the third quarter was slower but move-ins still outpaced the new construction being brought online.  Greater Phoenix experienced 574,000 square feet of net absorption during the past three months, which brings the total for this year to 2.4 million square feet.  The first nine months of 2017 recorded 1.6 million square feet of net absorption. 

Vacancy fell to 14.2 percent in the third quarter, which is 170 basis points below a year ago.  Vacancy rates have improved across property classes, which reflects the overall strength of our office market.  Class A vacancy has dropped 150 basis points in the past year, even with the addition of more than a million square feet of new space.

Declining vacancy has pushed up rental rates over the past few years.  Asking rents now average $24.81 per square foot, up 2.6 percent from 12 months ago.  Class A rental rates have increased 2.6 percent in the past year, reaching an average of $28.96 per square foot.  Asking rents in Class B and Class C buildings have increased 2.5 percent I the past 12 months.

Construction completions of new office properties were modest during the third quarter, adding approximately 127,000 square feet to the inventory.  Year-to-date, less than 800,000 square feet of office space has come online.  This can be compared to the first three quarters of 2017 when 1.8 million square feet were added. Greater Phoenix currently has an estimated 3.1 million square feet of office space under construction.  Chandler leads the submarkets with more than 980,000 square feet underway, which will add to the 2.1 million square feet the submarket has added in the past five years.

Investment activity in the office sector dropped a bit from the second quarter, but 13 percent more properties have sold in 2018 than during the first nine months of 2017.  The median price year-to-date is $168 per square foot.  Prices spiked during the second quarter but have returned to closer to long-term figures in the third quarter.  Cap rates have averaged 6.9 percent this year in an environment of rising interest rates.

The outlook for the Greater Phoenix office market remains optimistic as businesses expand and new companies come to the Valley.  During third quarter, approximately a dozen companies announced plans to add workers in Greater Phoenix.  IT consulting company Infosys will more than double its workforce in Arizona by adding 1,000 jobs over the next five years. During second quarter, Nationwide Insurance and Deloitte announced plans to add thousands of new jobs.  We have more than three million square feet under construction, which is up more than 75 percent from a year ago.  The fourth quarter is typically an active period, so a robust finish to the year is expected.

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