Phoenix office market closes decade with record-breaking stats

Above: Voya Financial secured a 151,359-square-foot facility in Chandler for its new permanent metro Phoenix hub. The new location at 1700 South Price Road, will employ more than 1,000 people once it is fully operational. Office | 19 Jan |

2019 was another banner year for the Phoenix office market. By any measure, the sector is thriving and performing at the highest levels, with record-breaking stats across the board to end the decade, according to a report from Kidder Mathews..

The county’s vacancy rate for the Phoenix office market dipped to a post-recession record low while asking rental rates soared to an all-time historical high, which marks the 31st consecutive quarter of positive rent growth. The overall availability rate hit a record low leading to occupancy rates reaching a new high at levels the market hasn’t experienced in almost 15 years. At year end, both leasing and sales activity ended strong and development activity has really ramped up in the past few years, matching a previous post-recession record high in building volume. With such strong fundamentals, investors are bullish about the Phoenix office market and remain confident as Phoenix has been one of the top metros in the nation for job growth over the past several years. Population growth, a large and growing talented labor pool, diverse economy, and an attractive cost of living and doing business have helped to strengthen the value of the metro. Overall employment growth remains positive, as the Phoenix unemployment rate currently stands at 3.8% as of November, below the year-ago estimate of 4.2%. According to the Arizona Labor of Statistics Office of Economic Opportunity, Phoenix metro’s total employment increased by 92,000 jobs year over year between November 2018 and November 2019.

The year-end office vacancy level reached a new post-recession record low of 12.7%, down 50 basis points from 2018. Vacancies are currently at the cyclical low and the market hasn’t experienced this since 2006 when it posted at 10.2%. Submarket clusters with the least vacant space include Southwest Phoenix at 5.5% followed by Mesa East at 6.3%. Submarkets in Phoenix with the highest vacancy rates include the Midtown at 19% and Northwest Phoenix which posted a vacancy rate of 20.8%. There was a total of approximately 2.76M square feet absorbed in 2019, slightly below this time last year but still showing signs of a strong market. The net absorption was mostly concentrated in the East Valley, Central Corridor, and Airport submarket clusters, with East Valley posting the largest number at 1.38M square feet alone. A factor contributing to the recent vacancy compression and robust rent growth has been a relative lack of new spec supply in the development pipeline. While deliveries have remained below the historical average, speculative construction is starting to ramp up in Phoenix. The increase in development is welcomed and will result in some much-needed relief, as demand has consistently outpaced new supply. Approximately 3 million square feet of new construction has been delivered in 2019, nearly matching the post-recession record high of 3.1 million square feet in 2015.

Average asking rental rates for office properties county-wide climbed to an astounding all-time record high at $26.76 per square foot on a full-service basis, a number the market has never previously experienced. Following suit, both Class A and Class B space reached a record high in 2019 at $31.44 and $24.36 per square foot on a full service basis. Direct asking rates in the Camelback Corridor were the highest, averaging $32.88 per square foot. By contrast, the Pinal County submarket had the lowest rate, reporting an average asking rent of $15.72 per square foot. Despite consistent rent appreciation and gains that have consistently outpaced U.S. growth over the past several years, Phoenix maintains its position as an affordable office market when compared to the average office rents in the nearby West Coast markets, which are roughly 50% higher than that of Phoenix. The relative affordability of Phoenix will continue to attract tenants looking to set up or expand operations in the western part of the US without paying the premium rents in coastal markets.

Strong growth in office-using employment and a well-balanced supply and demand pipeline continue to attract investors to buy into the Phoenix office market. Transaction volume has ticked up this year posting at 13.1 million square feet, an increase when compared to the last three years, which averaged a little over 10.5 million square feet each year. The average sale price for Phoenix office assets was again another record high in the market posting at $193.89 per square foot, with the exception of 2017’s average price which was $227.28 per square foot. A notable transaction that took place in the third quarter of 2019 was the sale of Waypoint Campus, acquired by Innovatus Capital Partners in August. Totaling four buildings and almost half a million square feet, the project is the highest-priced office sale of the year. 

Market Highlights:

RENTAL RATES – are now on their 32nd consecutive quarter of positive growth at a post-recession record high of $26.76 per square foot on a full-service basis.

VACANCY – rate hit a post-recession record low at 12.7%

CONSTRUCTION activity ramped up in 2019 with just over 3M square feet in deliveries.

Notable Lease Transactions:

• DoorDash|1033 W Roosevelt Way|Tempe|345,795 SF

• Voya Financial|1700 S Price Rd | Chandler |151,359 SF

• Choice Hotels|NWC Loop 101| Scottsdale Airpark |150,000 SF

Notable Sale Transactions:

• Innovatus Capital Partners| Waypoint Campus | Tempe |426,951 s.f. | $107.65M or $252/s.f.

• ScanlanKemperBard Companies| 101 & 251 N 1st Ave |Downtown |520,514 s.f. | $92.75M or $178/s.f.

• NGP Management, LLC| 21711 N 7th St | Deer Valley/Airport |210,202 s.f. | $92.3M or $439/s.f.

 

 

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