Nearly 3.1 million square feet of office space is currently under construction in metro Phoenix, according to a new report from CBRE. The construction pipeline is heavily weighted with speculative development, with only 35.6 percent of space preleased, an indication of strong developer optimism.
Development activity is heavily concentrated in Phoenix’s Southeast Valley (Chandler, Tempe, Gilbert and Mesa), which accounts for 83 percent of space currently under construction (or 2.5 million square feet) fueling some concern for potential oversupply in the region. However, this fear is somewhat unwarranted given the high demand for office space (driven by strong hiring) in the area and relatively tight vacancy in the Southeast submarkets.
“When people see the significant amount of new office development across the metro, particularly in the Southeast Valley, they flashback to the periods of overbuilding leading up to the last recession and alarms are going off,” said Jessica Morin, Senior Research Analyst for CBRE Phoenix. “However, we are confident the steady pace of deliveries combined with robust employment growth will give demand time to outpace new supply in the near-term.”
The slow and steady timing of expected deliveries will give demand time to keep pace with new supply. Of the 2.5 million square feet underway in the Southeast Valley, only 694,000 square feet is scheduled to come online during 2018 and demand is expected to surpass new construction. Over the past four quarters, net absorption in the Southeast Valley totaled 1.3 million square feet—a gauge of how demand will measure up for calendar year 2018.
Despite the expectation that net absorption will outpace new inventory metro-wide, supply and demand dynamics will differ by submarket. In Tempe, for example, vacancy is below 5.0 percent, compared to the market average of 16.5 percent. Yet, only two build-to-suits totaling 385,000 square feet will be delivered in Tempe during 2018. Three build-to-suits totaling 365,000 square feet and two new speculative developments, the 352,481-square-foot The Grand at Papago Park and the 270,000-square-foot The Watermark Tempe, are slated for 2019 delivery. This will continue to support tight fundamentals in Tempe, which landlords will leverage for continued rent growth.
In the Chandler submarket, approximately 1.5 million square feet is scheduled to be delivered by the end of 2019, with less than a third preleased. This will represent a 36 percent increase to the submarket’s existing office stock. While Chandler’s vacancy rate is below the market average at 10.8 percent, the wave of new supply will soften fundamentals in the submarket and may impede rent growth in the near-term.
