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Office vacancy rate in greater Phoenix lowest since 2008

office, vacancy rate, Phoenix, Arizona

2016 Third Quarter Greater Phoenix Office Highlights

Below are excerpts from CBRE Marketview, Office, Q3 2016 and Collier International’s Research & Forecast Report Greater Phoenix/Office 3Q 2016.

Vacancy

  • In quarter 3 (Q3) 2016, net absorption in Metropolitan Phoenix reached 801,250 square feet (s.f.). For the fifth consecutive quarter, Tempe led all submarkets with 621,885 s.f. of positive absorption. It is rewarding that State Farm’s Marina Heights Tempe campus absorbed 363,000 s.f. in Q3 because the Fortune 100 Company chose the site over many other alternative locations.
  • Net absorption in Greater Phoenix over the past year has reached more than 4.9 million square feet (s.f.) compared to a total of only 1.9 million s.f. in the 12 month period ended one year ago. This is an astounding and impressive accomplishment.
  • The overall vacancy rate for Metro Phoenix ended Q3 at 17.8 percent, the lowest rate since 2008.

Rents

  • The full service asking lease rate for the Greater Phoenix office market was $24.01 per s.f. at the end of Q3 2016 reflecting a 6.8 percent increase year-over-year.
  • At the end of Q3 Valleywide Class A, Class B and Class C asking rates were respectively $32.30, $24.25 and $17.63.
  • Corridors with walking amenities are attracting tenants. For instance, rents have increased by more than 25 percent over the last 24 months in Tempe and South Scottsdale; and Downtown Phoenix and the Camelback Corridor experienced rent growth of around 8 percent during the past 12 months.

Construction

  • A remarkable amount of build-to-suit construction was under way during the third quarter of 2016. Of the 1.6 million s.f. under construction in Q3, nearly 900,000 was preleased.
  • While the construction pipeline is below historic levels, there is a significant amount of space being repositioned to office. In fact, approximately 990,000 of the 1.2 million s.f. under renovation is former back office/flex space needed to address a scarcity of available land for office development in the Tempe and South Airport submarkets.

Investment Trends

  • The median Greater Phoenix transaction price for office buildings in Q3 was $141 per s.f. raising the year-to-date median price to $130 per s.f.
  • Cap rates across the Valley have averaged approximately 7.6 percent in 2016 which is essentially the same as 2015.

Outlook

According to Colliers, “The Greater Phoenix office market is expected to continue to improve at a steady pace to close this year, setting the stage for further strengthening in 2017. Net absorption is being driven by employment growth, which has remained positive, but is continuing at a more modest pace than it did earlier in the recovery cycle. Ongoing tenant demand for space has driven the vacancy rate lower and pushed rents higher. Rent growth should continue for several more quarters, as market vacancy approaches the 15 percent range. On the supply side, construction will be more modest than in previous recoveries, which is preventing the market from becoming overbuilt.”

Gary Ringel, CGREA