Phoenix added millions of square feet of new office space in 2016, and companies filled that space at a near 10-year-high absorption rate, according to the Q4 2016 Phoenix Office Insight report released last week by the Phoenix office of JLL.

Collectively, this activity improved the Valley’s office occupancy picture, pushing total vacancy rates down 120 basis points year-over-year to 19.7 percent.

Dave Seeger
Dave Seeger (Photo courtesy of JLL Phoenix)

On the construction front, Phoenix’s 2016 office deliveries surpassed 2.4 million square feet, just shy of the 2.5 million square feet of new office space delivered in 2015. Total positive net absorption during 2016 exceeded 3.1 million square feet – the highest recorded demand in the Valley since 2005, when more than 4.0 million square feet was taken up by the market.

Tempe led all submarkets in construction, thanks to 1.2 million square feet of new Class A office space delivered at State Farm’s Marina Heights campus along Tempe Town Lake. Tempe also accounted for 1.4 million square feet (nearly 45 percent) of all 2016 absorption – again due in large part to the completion of three of the five office buildings at Marina Heights.

Scottsdale Airpark and Chandler were the year’s second and third place winners for positive net absorption, recording 498,649 square feet and 301,463 square feet, respectively.

“For the past 10 years, the Southeast Valley has accounted for more than 67 percent of the entire Phoenix metro office absorption when it only accounts for 29 percent of the total Phoenix metro office inventory – and there are no signs that this interest level is slowing down in 2017,” said JLL Managing Director Dave Seeger. “There are approximately 2.5 million square feet of active tenants in the market that are interested in locating within the Southeast Valley. Companies are continually drawn to this area for its easy freeway access, rich labor pool and access to Arizona State University.”

Chris Latvaaho
Chris Latvaaho (Photo courtesy of JLL Phoenix)

Downtown Phoenix also achieved a benchmark in 2016, receiving 122,220 square feet of repurposed office space in the fourth quarter and marking the first time new inventory has been added to the submarket since 2010. Situated in the fast-growing Warehouse District at 515 E. Grant St., the redeveloped warehouse is currently 100 percent pre-leased and will be the future home for tech start-ups WebPT and Galvanize.

“The emergence of the Warehouse District is consistent with the market-wide demands we’re seeing from tenants wanting collaborative, creative work space,” said JLL Vice President Chris Latvaaho. “Unlike traditional office spaces in downtown Phoenix that may have limitations, repurposed warehouse space offers opportunities for companies to create their own unique brand in older, historic brick and mortar that have been fully restored and modernized to help create that cool and hip work environment through the means of higher ceilings, exposed brick and skylights.”

Latvaaho adds that interest in the Warehouse District by office and retail users helps to improve the entire image of Downtown Phoenix, recruiting Millennials who are interested in true live, work, play environments, and who will continue to drive growth in more amenities like retail.