Greater Phoenix posted its first quarterly decrease in office vacancy since the pandemic hit in 2020, according to a report released by Colliers in Arizona. Additional office market conditions include steady rental rates and impressive investment sales.
Population growth and economic expansion in Greater Phoenix are credited with helping the area’s office market remain resilient. Unemployment in Phoenix hit its historic lowest level in November 2021 at just 2.8 percent. The area has increased its labor force by 18,300 employees as compared to pre-pandemic February 2020. Phoenix was ranked #2 for inflow of residents, according to Redfin.com, only being topped by Miami, FL.
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Direct vacancy of office space decreased 40 basis points during fourth quarter 2021 to 14.0 percent. This was a welcomed sign, but vacancy rose 90 basis points over the entire year 2021. Sublease availability increased again during fourth quarter, but the volume is showing signs of slowing down. Fourth quarter added the lowest amount of new sublease space to the market since the pandemic began. Isagenix added the largest block of Class A space to the sublease market, putting up 50,000 square feet at Rivulon. On an optimistic note, sublease deals are getting completed approximately 56 percent faster than direct deals with landlords, when considering time on the market of deals signed larger than 5,000 square feet.
Fourth quarter brought 378,574 square feet of positive net absorption, marking the best quarter since 2020. However, previous quarters of negative net absorption during 2021 resulted in the full year’s absorption landing in the negative zone at -266,366 square feet. Chandler and Scottsdale Airpark posted the two highest levels positive absorption in Class A buildings. The largest deal in Gilbert was Morgan Stanley leasing 48,624 square feet at Rivulon Commons. Choice Hotels posted the largest move of fourth quarter, taking occupancy of its new 150,000-square-foot building at Cavasson. Early Warning Services committed to 124,879 square feet at Chaparral Commerce Center III and will be relocating from McDowell Business Park near the end of 2022. Class A sublease space in desirable submarkets was very active. During fourth quarter 11 sublease deals closed involving tenants of more than 5,000 square feet. Scottsdale submarkets are home to 60 percent of sublease deals signed.
Rental rates have showed signs of positive momentum in the fourth quarter, having struggled since the start of the pandemic. The quarter posted the first rental increase both year-over-year and quarter-over-quarter in the past two years, ending at $27.87 per square foot. Class B building gained the largest improvements during fourth quarter, increasing over-the-quarter and year-over-year to an average asking rate of $25.06 per square foot. 100 Mill in Tempe had previously posted the highest rental rate in the market at $50.50 per square foot. However, this past quarter, The Grove at 44th Street and Camelback achieved a higher rate of $53.00 per square foot.
Two projects totaling 300,0000 square feet were completed during fourth quarter. Choice Hotels will occupy the 150,000-square-foot building recently completed in the Cavasson development. In addition, the second building of the master planned Cavasson project was completed during fourth quarter. There are 1.8 milion square feet of office space currently under construction, with 44.2 percent of the space already pre-leased. Tempe has the most development underway, followed by Camelback Corridor.
Investment sales were the strongpoint of the fourth quarter, bringing the second highest quarter of total volume in the past three years at $1.06 billion. Activity during fourth quarter posted an increased price per square foot of $211. Office sales during 2021 totaled $2.9 billion with a median price for the year of $193 per square foot. Sales in fourth quarter were fueled by several newer Class A properties increasing the median price per square foot. Three transactions over $100 million were completed in the last three months of the year and alll were built in 2019 or earlier. Block 23 in Downtown was sold to City Office REIT for $150 million A two-property asset at Allred Park Place sold to Manulife US REIT for $106 milllion. Chandler Viridian had a multi-tenant property built in 2019 sell to Macquarie Asset Management for $102 million.
The robust health of the Phoenix economy is bringing new companies into the market and driving growth of existing companies . Fourth quarter activity was a positive indicator of stabilization in the office market and a horizon of improvement. However, the influx of sublease space and the vacancy resulting from the pandemic will force developers to pause any speculative development for the several quarters ahead.
