The Phoenix office real estate market experienced over a million square feet of positive net absorption, strong leasing activity and steady rental rates during the first quarter of 2017, according to Kidder Mathews’ Phoenix office Q1 2017 report.

Direct vacancy decreased to 15.9 percent, a 120 basis point decrease from this time last year. The total vacancy level of 15.9 percent hasn’t been seen since the second quarter of 2008. The strong local economy and job creation should drive real estate market growth for many quarters to come. The Phoenix unemployment rate sits at 4.5 percent, only a 10 basis point decrease from the 4.6 percent recorded this time last year.

Submarkets in Phoenix with the highest vacancy rates include North Scottsdale/Carefree at 28.3 percent, Northwest Phoenix at 25.6 percent and Midtown at 22.7 percent. Submarkets with the least vacant space include Tempe at 6.6 percent, Mesa Downtown at 8.0 percent and Pinal County at 8.4 percent.

Direct net absorption of close to 1.2 million square feet was mostly concentrated in the East Valley submarket cluster. As of the first quarter, over 1.2 million square feet of new construction has been delivered. Another 700,000 square feet of office product is currently under construction, of which 62.4 percent is Class A space and the remainder is Class B.

Asking rental rates market wide for office properties remained stagnant at $23.64 per square foot on a full-service basis, with Class A office space going for $28.44. This represents a 5.3 percent increase in rates from this time last year. Asking rates are highest in the Scottsdale submarket cluster, where they average $26.88 per square foot and are growing steadily each quarter. By contrast, the lowest rates are found in the Mesa Downtown submarket, which reported an average asking rent of $15.00 per square foot.

The average sale price in the first quarter for office investment assets was $180 per square foot, up from $170 per square foot this time last year. Average cap rates increased from 6.7 percent at the start of 2016 to 6.9 percent this quarter. Total dollar volume for office asset sales was over $200 million from 83 transactions.

Key Transactions

  • Circle K Stores, Inc, — 1130 W. Warner Rd., Tempe Southwest — 75,000 s.f. Leased
  • Endurance International Group —1500 N. Priest Dr, Tempe — 72,000 s.f. Leased
  • NPL — 19820 N. 7th Ave, Deer Valley/Airport, 45,000 s.f. Leased
  • Enterprise Rent-A-Car — 4100 W. Galveston St., Chandler — 43,000 s.f. Leased
  • Hoya — 4800 N. Scottsdale Rd., Scottsdale South — 26,000 s.f. Leased

Source: CoStar Data