According to CoStar’s recent report, office fundamentals continue to strengthen in Phoenix. With absorption consistently outpacing supply additions since 2010, vacancies were below the historical average in Q3. This vacancy compression has translated into some of the strongest rent gains in the country, and the metro has consistently ranked among the top markets for rent growth in recent quarters. Robust growth in office-using employment, bolstered by corporate expansions and relocations, has the potential to produce further occupancy gains.
Substantial growth in office employment has helped fuel demand for office space. Office-using employment in Phoenix has increased by about 20% in the last five years—outpacing national growth in this time by roughly 5%—and nearly a third of jobs in the metro use office space.
Recent leasing has been notably strong at the top end of the market. Demand for new, top-tier assets has spurred a substantial amount of spec developments, particularly in Tempe and Chandler. The first phase of the Grand at Papago Park Center, a 213,000 SF office project that delivered in April of 2017, preleased 40,000 SF to software giant SAP. Shortly after delivery, MUFG Union Bank inked a lease for the remaining 173,000 SF of office space.
The Valley’s improved fundamentals have translated into robust rent growth in the last several years. Like most of the U.S., Phoenix’s gains are decelerating from the highs of 2015–16, but were still above the metro’s historical average at the end of Q3. Rent growth at the top end of the market has been even more pronounced, with rents in 4 & 5 Star assets surging by more than 35% since 2013, compared to about 23% in 3 Star properties.
Furthermore, the wide gap between rents in Phoenix and those of other western markets suggests that rents in Phoenix may still have room to run. The outlook for office-using employment growth in the Phoenix metropolitan area remains strong, so supply might become the limiting factor on rent growth.
Office construction is a far cry from the boom that took place in the last cycle. From 2001-09, annual deliveries averaged 5.7 million SF, but from 2010-17 it averaged 1.4 million SF.
A number of projects still remain in the pipeline. At the end of Q2, roughly 3 million SF of office space was under construction. One of the more notable developments underway is the 4 Star 250,000 SF Offices at Chandler Viridian. Hines broke ground on the building last year and is expected to deliver it by year-end.
Institutional buyers have made some big splashes in Phoenix in recent years, including plays for some of the metro’s most recognizable office buildings in primary employment hubs. In June, New York Life acquired the 302,209 SF 24th at Camelback from Hines for $100 million ($331/SF). The Camelback Corridor asset was reportedly more than 90% occupied at the time of sale with tenants including Cisco, Greenberg Traurig, AAA and Regus.
Click here for the complete CoStar report.
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