The Greater Phoenix office market posted its strongest first quarter in seven years, according to a recent report released by Colliers International in Arizona. The metro area posted the nation’s second largest increase (±3.1 percent) in non-farm employment February 2018-February 2019, which has fueled demand for office space. Job growth during the first two months of 2019 averaged 3.1 percent, which is nearly double the national average. Gains were largest in the construction, education, health services and manufacturing sectors.
Preliminary estimates indicate that metro area employers added nearly 64,300 new jobs in the time frame noted above. According to the Bureau of Labor Statistics, this places Phoenix-Mesa-Scottsdale second only to Metro Orlando in job growth.
During the first three months of 2019, Greater Phoenix experienced 850,000 square feet of net absorption, which is the second highest first quarter reading in the past seven years. This level of activity is fueling new development and rental rate increases. By comparison, the office market posted net absorption of just 77,000 square feet in fourth quarter 2018. The city’s largest leases for the quarter were for properties in Tempe and Chandler. Voya Financial leased 151,359 square feet at Allred Park Place in Chandler. Voya plans to employ 1,000+ workers in the space. Additionally, WeWork leased nearly 70,000 square feet at The Watermark in Tempe.
Significant tenant movement during the past three months included Northern Trust’s expansion of its Tempe-based regional headquarters at Discovery Business Campus. Freedom Financial moved into its Tempe facility at RIO2100, Allstate Insurance too occupancy at One Chandler Corporate Center and Deloitte moved into Nationwide Realty’s property called The Commons at Rivulon.
The office space vacancy in Greater Phoenix fell to 13.6 percent during first quarter, which is 160 basis points lower than one year ago. This marked the eighth straight quarter of office vacancy declines for the metro area. Every property class has experienced improvement. The Tempe submarket boasts the lowest vacancy at 6.8 percent, while Deer Valley Airport behind it with 10.9 percent vacancy. Other low vacancy submarkets include South Tempe/Ahwatukee at 11.3 percent, 44th Street Corridor with 11.4 percent vacancy and Scottsdale Central with 12.5 percent.
Healthy market conditions are pressuring rental rates up. The average asking rent during first quarter was $25.63 per square foot, up nearly five percent from a year ago and elevated 3.3 percent from fourth quarter 2018.
Deliveries of new space have been declining in recent quarters, but the pipeline for new projects remains robust. During first quarter, 944,000 square feet of new space came online. Currently, just short of 2.3 million square feet are under construction. Tempe and Chandler submarkets are leading the metro area in new development with more than 961,000 and 748,000 square feet of space underway respectively. During the past five years, developers have added more than 3.6 million square feet to Tempe’s market and 2.6 million square feet of office space to Chandler.
Investment sales of office properties also improved during the first quarter of 2019. Sales volume increased 19 percent to $387 million in 48 transactions. The media price per square foot remained steady at $147 with cap rates at 7.1 percent. Cap rate levels have averaged in the high-six percent to low-seven percent range for the past year, which reflects robust investor interest in Greater Phoenix quality office assets.
The outlook for Greater Phoenix’ office market remains optimistic through 2019. Vacancy is expected to rise slightly as some speculative office projects come online with vacancy to lease. Net absorption should total approximately 2.5 million square feet in 2019, which is below the 3.1 million average we have posted since 2014. Rental rates will rise as new construction puts pressure on the averages, but the rate increases will be moderate. Construction activity will escalate this year, as more projects break ground in the coming months.
