Phoenix office market remains strong

Real Estate | 14 Oct |

The Greater Phoenix office market remained strong through the third quarter of 2019 and remains in the Top Five metro areas for job creation in the United States. Since July, more than 14,000 new jobs have been announced, which will fuel demand and development of more office space.

Third-quarter 2019 was the second strongest quarter for absorption since 2015. Nearly one million square feet of net absorption occurred during the third quarter, bringing the year-to-date total of net absorption to 1.9 million. This marks the 30th consecutive quarter of positive net absorption. Colliers predicts this pace will result in approximately 2.6 million square feet of net absorption for 2019. Despite below levels posted in recent past years, this amount of absorption will maintain a robust market.

Tempe, Chandler and Deer Valley/Airport submarkets experienced the largest leases.  WageWorks took 150,000 square feet at the Union at Riverview campus on the Tempe/Mesa border. Deloitte opened its first 100,000-square-foot tech center at The Commons at Rivulon and expanded its presence there by almost another 100,000 square feet. Deloitte is expected to hire an additional 900 employees, adding to the 2,500 previously announced. Finally, Cox Communications signed a lease for 31,000 square feet at the Loop 101 Business Center.

During 2019, employers have added more than 57,800 jobs. Year-over-year job growth monitored since January indicates an average of three percent for Greater Phoenix, nearly double the national average. Third-quarter jobs were primarily created in the construction, manufacturing, and education & health services.

The office vacancy rate remains below 14 percent, dropping 250 basis points since a year ago.

The metro’s robust office market is illustrated throughout all classes of property. Class A vacancy at 14.5 posted its eighth consecutive quarter below 15 percent. Class B vacancy declined during 2019 to 13.9 percent at the end of the third quarter. Vacancy is expected to creep higher by the end of this year as more projects come online with vacant space. Deliveries of new buildings are expected to hit 2.75 million square feet, the largest amount in one year since 2015 with 3.12 million square feet.

Rental rates are increasing in response to declining vacancy. Asking rents ended the third quarter at $24.04 per square foot, which is a three percent increase from one year ago. Asking rents rose 0.6 percent over the third quarter and 2.9 percent year-over-year. Asking rents are expected to push higher for the remainder of 2019, but at a more moderate pace.

Greater Phoenix added 776,795 square feet of new space during the third quarter. Deliveries have decreased over recent years, but the pipeline for new projects is robust. More than two million square feet is currently under construction, 60 percent of which is preleased. Tempe and Downtown South submarkets lead the metro in construction. New construction starts have trended downward since fourth quarter of 2018, but new job growth announcements may stimulate new projects.

Investment sales volume rose approximately eight percent during the third quarter to $756 million across 54 transactions. The median price per square foot decreased slightly to $168 with cap rates resting at 7.5 percent.

Real estate markets are expected to maintain current health conditions, especially in the wake of recent announcements from the Federal Reserve and negative interest rates in Europe. As such, demand for commercial real estate assets in the United States should continue to increase as investor need for cash flowing vehicles rises due, in large part, to aging demographics. 

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