Investment sales of Phoenix office properties rally despite negative net absorption

Above: Phoenix cityscape in downtown at sunset. Real Estate | 26 Oct |

The Greater Phoenix office market posted sizable negative net absorption during third quarter, due in large part to JP Morgan Chase vacating 721,349 square feet at its landmark high-rise in downtown, according to a report from Colliers.  Despite absorption problems, the market benefited from dynamic investment sales and an uptick in rental rates, according to a report released by Colliers in Arizona.

The market experienced -317,887 square feet of net absorption during third quarter, marking the second worst quarter since the beginning of the pandemic and the second lowest in five years.  The negative net absorption was dramatically impacted by JP Morgan Chase’s move out of Downtown to its new, Tempe campus.


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If you analyze the market without consideration of JP Morgan Chase’s relocation, the picture looks much more dynamic with more than 400,000 square feet of positive net absorption during third quarter.  Direct leasing activity experienced a 30 percent increase over-the-quarter.  Dansons, Inc. purchased a former Nationwide building in Central Scottsdale and Goettl Air Conditioning acquired a 55,000-square-foot building in the Airport Area.  Sublease activity remained very active, particularly in the 10,000-50,000-square-foot range of tenants.  During third quarter, 10 sublease transactions were completed at an average size of 30,908 square feet.

Direct vacancy in the office market increased 20 basis points quarter-over-quarter and 160 basis points year-over-year to reach 14.2 percent at the end of September.  Class A property vacancy increased by 150 basis points year-over-year to reach 16.7 percent at the end of third quarter.  Chase Bank’s former space in Downtown now offers the largest block of existing office space available in the entire market.

Sublease availability continued expanding during third quarter, peaking at the highest level ever witnessed in Greater Phoenix at 4.7 million square feet.  During the last 45 days of the quarter, four large tenants added 526,755 square feet of new sublease space to the market.  These additions were primarily focused in Scottsdale Airpark and Tempe submarkets.  Despite the increases in vacancy during the pandemic, the combination of direct vacancy and sublease availability still falls far below the peak level of 21.8 percent vacancy experienced in 2011.

Rental rates gained momentum after declining during the first half of 2021.  During third quarter, rates increased slightly to an average of $27.76 per square foot.  Rates increased over-the-quarter by 0.65 percent, but decreased 0.04 percent over-the-year. The large amount of discounted sublease space is placing downward pressure on rates and restricting increases. As the city expands, suburban areas are experiencing the largest increases in rental rates.  Arrowhead, West I-10 and Glendale all posted increases in rates both over-the-quarter and year-over-year.  Downtown, both North and South, had decreasing rental rates both over-the-quarter and year-over-year.

Construction has been relatively slow with just three projects being completed in third quarter.  The properties total 228,934 square feet and held a relatively high vacancy of 74.9 percent at the time of delivery.  Currently 16 projects are under construction totaling 1,894,795 square feet.  Approximately 28.44 percent of this space is pre-leased. Tempe submarket has the most development underway with 470,526 square feet, which is 32.5 percent pre-leased.

Investment sales rose significantly during third quarter, posting the second best quarter for total volume in the past three years.  During the past three months, Greater Phoenix posted $858 million in office property sales.  This is equal to 94 percent of the volume posted during the entire first half of the year.  Year-to-date median price per square foot is $185.  During third quarter, the market completed two transactions over $100 million.  The Boyer Company sold two of the Rio2100 buildings totaling 300,000 square feet to Strategic Office Partners for $132 million.  Fountainhead Office Plaza, comprised of two buildings totaling 445,957 square feet, was sold for $117.5 million.

Despite the sublease market growing, more workers are beginning to return to the office.  Working in an office environment creates collaboration and drives spontaneous business interaction.  Recent activity in the market from new-to-market tenants demonstrates the strength of our labor force and the appeal of our pro-business community.  These factors offer a positive outlook for the office market moving forward.

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