Cushman & Wakefield report showed the Metro Phoenix office market posted the largest midyear net gain since 2006, with just over 1 million square feet during second quarter 2016.

At the 2016 midyear point, office vacancy in the Metro Phoenix office market stood at 18.0 percent, a 20-basis-point reduction from first quarter 2016, and an even more significant drop of 130 basis-point from the 19.3 percent reading of Q2 2015.

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“The Metro Phoenix job market continued to show signs of improvement, adding just over 62,000 jobs year-over-year through May 2016,” says Curtis Hornaday, associate market director of research with Cushman & Wakefield.  “Out of the 62,000 jobs added, nearly 40 percent were office sector jobs. Over the past five years, the Phoenix office sector has outperformed state and national averages by virtue of favorable demographics and being viewed as a much cheaper technology hub when compared to California.”

The Tempe North submarket dominated all other submarkets during the second quarter with over 572,000 square feet of net absorption, which accounts for 57 percent of all occupancy growth for the entire market in the second quarter. Tempe North’s net gain is due to State Farm taking down the second building (620,000 square-feet) of their five-building regional headquarters, all of which are build-to-suit (BTS) properties. The Price Corridor submarket followed with over 254,000 square feet of growth, which can be attributed to Infusionsoft occupying the fourth building (100,000 square feet) in Allred’s Park Place Central development and ViaSat moving into its 72,000 square feet of built to suit space.

Tenant demand remained overwhelmingly high for Class A space during the second quarter posting a net gain of over 638,000 square feet. In regards to year-to-date performances, Class B space accounts for over 47.6 percent of the total absorption in Metro Phoenix, with Class A and Class C following at 46 percent and 6.4 percent, respectively.

In second quarter 2016, four new projects broke ground totaling over 733,000 square feet, all of which are speculative buildings. Cushman & Wakefield is currently tracking nearly 2.5 million square feet under construction in the Metro Phoenix office market, 1.6 million square feet scheduled to be completed by the end of 2016.

“In total, we are projecting over 2.9 million square feet of new inventory to be delivered during 2016, 55 percent of which is pre-leased,” said Jerry Noble, Senior Director with Cushman & Wakefield. “By year end, we could see net absorption exceed 3.0 million square feet as job growth remains positive.”

The average asking rent in the Metro Phoenix continues its upward trend, with a current direct rate of $23.63-per-square-foot, on an annual full service basis. This marks a 0.6 percent ($0.15-per-square-foot) increase quarter-over-quarter and a staggering 6.4 percent ($1.42-per-square-foot) increase year-over-year. The Mesa ($14.73-per-square-foot) and Scottsdale South ($30.39-per-square-foot) submarkets recorded the largest quarterly gains in Metro Phoenix, increasing 4.1 percent and 3.8 percent, respectively.

In regards to the average asking rates for Class A space, the Camelback Corridor ($34.80-per-square-foot) and Scottsdale South ($31.72-per-square-foot) submarkets remain the high-water marks. Despite having the highest rates in Metro Phoenix, Cushman & Wakefield tracked over 84,000 square feet of combined leasing activity for Class A space in these two submarkets during second quarter 2016.

“Continued demand for premium product will drive up the region’s overall average asking rents,” added Hornaday. “Asking rents are up 6.4 percent year-over-year and are up over 19.2 percent from the post-recession low point reached in Q1 2013.”