Stabilization in the Valley of the Sun - A Look into the Phoenix Office Market
By Tyson Breinholt
After muddling through the post-recession with office vacancy rates stuck north and around 20 percent for the overall Phoenix office market, the office sector has begun to show elements of stabilization in the Valley of the Sun.
The unemployment rate in Phoenix plummeted to 5.0 percent in April this year, from over 11 percent near the end of 2009.
The overall office vacancy ended the first quarter this year at 17.2 percent. Second quarter figures were not available by the time this article went to press but my colleagues and I think it will dip below 17 percent at mid-year. And if it does the vacancy rate will have dropped nearly 300 basis points over the previous 24 months.
The submarkets with the lowest vacancy rates are the usual suspects in our marketplace: Scottsdale (11.2 percent), 44th Street Corridor (aka Camelback Corridor at 11.6 percent) and Tempe, which houses the main campus of Arizona State University (12.7 percent).
The slow and steady recovery makes for a healthier market than boom and bust swings. Some of the region’s larger office occupiers have expanded in recent years, which accounts for a substantial amount of office space absorption. A short list of growing companies with significant footprints here includes State Farm, First Solar, Lincoln Property Trust, GoDaddy, General Motors, Laser Spine Institute and Zenefits.
Demonstrating that Phoenix remains attractive to technology tenants, Amazon, eBay (PayPal) and Shutterfly have recently opened new regional offices in the Phoenix area.
State Farm is involved in two of the largest office developments currently under construction by Ryan Companies and Sunbelt Holdings at its Marina Heights mixed-use project.
The insurance company has pre-leased over 1 million square feet on Rio Salado Parkway and is purportedly pulling some employees out of its current location at Fountainhead Corporate Park in Tempe and has already shuttered its big campus in Rohnert Park (Northern California); some of those people may be relocating to Phoenix.
Upon completion, Marina Heights will be approximately 2 million square of offices with 60,000 square feet of retail space in multiple buildings. Phase I is expected to be completed later this year and final completion is slated for 2017. State Farm plans to occupy buildings A, B, C, D and E for its Southwest regional hub.
In addition to the State Farm projects, approximately 3 million square feet of offices are being built speculatively, though as everyone in this business knows, some of the spec space may actually be in projects with some pre-leasing taking place.
The demand for spec space is strictly for Class A product. Of the approximate 25 million square feet of office space available in the market, about a third of it is Class A (7,082,935 square feet) and that space can be absorbed relatively quickly in an active market, particularly from move-up tenants sensing that the market is shifting toward equilibrium. As the market tightens rents are likely to go up and those companies in Class B or C space may make a move toward better locations and buildings with enhanced interiors.
Speaking of rents – they have been mostly flat in the last 18 months. Though some landlords have increased their rental rates in the improving market, many landlords instead have been removing concessions from lease terms or at least have modified them to be less favorable for tenants.
First quarter, overall office rents ended at $21.3 percent per square foot while Class A rents averaged $25.36 a foot. Class C office rents, subject to the location, ranged from $10 a foot to $15 a foot. It is quite normal in the Phoenix marketplace for rent deltas to move in $5 per foot increments from one class of space to another.
Tyson Breinholt is Partner/Associate Broker with Commercial Properties Inc./CORFAC International (CPI) based in Tempe, AZ. Data sources for this story were culled from CoStar, Xceligent and CPI agents in the firm’s two regional offices.