December 16, 2019

Phoenix Office Market Report 2019 Third Quarter Results

Cross your fingers, Cross your toes! Pray the recession doesn’t go!

According to the recent CoStar report, strong office-using employment growth, fueled by major corporate expansions and relocations, has driven demand for office space, particularly at the top of the market. Steady vacancy compression translated into some of the healthiest rent gains in the country in the past several years.  And a recent American Enterprise Institute (AEI) comparison ranked Arizona the number one inbound state in the nation.  Demand has outpaced new supply for eight consecutive years, and vacancies remain below the market’s historical average.

A question concerning many is are we headed for a recession in the near future? According to a recent Deloitte Economic Forecast, “The picture of slowing growth and loosening traction of monetary policy means that authorities—hampered by rising budget deficits—might have trouble responding to a crisis. One much-discussed sign of trouble is the inversion of the yield curve. Lacking any good theory to explain why a yield curve inversion leads to a recession, our forecast does not assume a recession in the baseline. But we continue to judge that the probability of a recession is relatively high (25 percent).” Fingers Crossed!



Robust employment growth in Phoenix is fueling demand for office space, and developers are attempting to keep pace. Healthy leasing activity has resulted in about 2,500,000 SF of net absorption over the past 12 months, in balance with the 2,500,000 SF of deliveries.  Since 2011, office demand has consistently outpaced new supply and compressed vacancies far below the market average to 12.2%.



Rent growth at the top end of the market is leading all other asset tiers. Rents in 4 & 5 Star assets surged by more than 35% since 2013, significantly outpacing gains in 3 Star properties. The widening gap between top-tier and mid-tier rents has spurred significant renovation activity that will allow landlords to capture higher rents.


Development is on the rise in Phoenix following several years of relatively limited construction. Over the past two years, developers completed less than 2 million SF annually, which is below the market’s long-term average of 3.8 million SF and far below the 8.9 million SF in 2007.
One of the most anticipated projects underway is the 4 Star, 228,000-SF Block 23 at CityScape in Downtown Phoenix. In addition to office space, the mixed-use development will bring a 45,000-SF Fry’s Grocery and 300 apartment units. The project broke ground in 17Q4 and is slated to deliver later this year. WeWork and Ernst & Young have committed to 90,580 SF and 19,500 SF, respectively. Just South of Tempe Town Lake, developers are underway on Phase 1 of the Watermark. The speculative Class A office project will deliver 265,000 SF of mixed-use office space upon completion in October. WeWork already committed to 68,900 SF of space, with the remainder of space available for lease.


Investors are bullish about the Phoenix office market. Strong office-using employment growth and a balanced supply and demand pipeline are attracting the attention of investors and increasing competition for Phoenix assets. Institutional players are making big splashes, as well. Some investors are taking another look and returning to the metro after having recovered from significant losses during the last recession.
Population growth, a large and growing labor pool, the diversifying economy, an attractive cost of living and doing business, and a business-friendly regulatory environment have strengthened the Phoenix value proposition.
While the number of companies expanding to metro Phoenix is noteworthy, the diversity of industries is necessary in sustaining the region’s long-term viability. Diversification of the local economy is shifting Phoenix away from its “boom-and-bust” tendency towards a more sustainable economy.


Today, Phoenix is leading the nation in job growth. The market has become a hub for financial services. State Farm selected Tempe for its 2.1-million-SF campus in 2015, which is expected to house up to 8,000 employees. Following State Farm’s lead, insurance and financial services companies have increased their footprints across the Valley, including sizable expansions by Farmers, Voya, Allstate, Freedom Financial, Bank of the West, and Nationwide.

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Phoenix Commercial Real Estate News
About Craig
Craig Trbovich is a commercial real estate broker with Commercial Properties, Inc. in Scottsdale, Arizona, specializing commercial sales and landlord representation in the Phoenix Metro Area. He applies 35 years of experience as a CPA and an investor to help other owners and investors maximize their returns, bringing a strong financial and tax perspective to all aspects of commercial real estate ownership. His strengths include sales and leasing, as well as an in-depth knowledge of the development community and the local market.