Greater Phoenix Commercial Market 2017

Bob Mulhern
Senior Managing Director, Colliers International

The Greater Phoenix commercial real estate market has continued to strengthen in 2017, although the pace of improvement has generally slowed. The office and industrial markets are showing the strongest gains with retail lagging behind.

The greatest source of demand for commercial real estate is job growth, and the Phoenix area is showing some of the strongest employment gains in the country. Since 2012, employers have added approximately 50,000 net new jobs per year. The pace of expansion peaked in 2015, when more than 62,000 jobs were added, an annual increase of 3.3 percent.

Job growth cooled by about 10 percent in 2016, and while final figures for 2017 are not yet available, early indications suggest that the final tally will be approximately 45,000 new positions. This would represent growth of more than 2 percent, outpacing the national rate of growth, and would put Phoenix among the top-15 U.S. markets for total new jobs in 2017.

Office Market

The Greater Phoenix office market has been improving steadily over the past few years. The vacancy rate ended 2016 at 16.4 percent, and preliminary year-end estimates show that the rate was essentially flat in 2017. Vacancy leveled off in part due to a slowdown in net absorption, which mirrored the easing pace of employment growth in the Greater Phoenix area.

While the local office market cooled off a bit in 2017, there was still plenty of activity. There were several large lease deals signed, particularly among financial companies. Many of these involve existing companies that are relocating within the market and in some cases expanding their payrolls in the process. Freedom Financial announced plans to lease 300,000 square feet at the Rio 2100 project. The company has approximately 1,600 workers in the Greater Phoenix area, and could double that figure when the company moves into its new facility near the intersection of the Loop 101 and the Loop 202.

Healthcare company McKesson is also relocating within the market. The company is moving into two new buildings totaling more than 270,000 square feet near the Loop 101 and Chaparral Road. The company is relocating its 1,400 employees from Old Town Scottsdale. The new facility will have space to accommodate approximately 2,200 employees, although the company has not yet announced plans to add those jobs.

Another headline-grabbing move this year involved Quicken Loans, which announced plans to relocate the company’s office from the Scottsdale Airpark to approximately 150,000 square feet in Downtown Phoenix.

While these moves show that there are big deals getting done in the Greater Phoenix office market, they also highlight that there are large blocks of space that are being left to be re-tenanted. Earlier in the cycle, something similar occurred as State Farm moved into its new facility on Tempe Town Lake. Several of State Farm’s previous locations leased up quickly. The pace of the re-leasing of these spaces will play a large role in the vacancy trends in Greater Phoenix in the coming quarters.

Industrial Market

The local industrial market continues to record strong performance, buoyed by large, international tenants moving into massive spaces. The Loop 303 has been a source of growth in the industrial market, with several companies setting up operations along the Loop 303 in recent years. This trend is continuing; earlier in 2017, Conair moved into a 1-million square foot build-to-suit facility while UPS is adding approximately 1,500 full- and part-time jobs in a new 970,000-square foot industrial facility also at the Loop 303 and Indian School Road.

The strong demand in the market is prompting both spec and build-to-suit construction projects. Industrial development averaged approximately 6 million square feet per year from 2013-2016, and that figure spiked to roughly 7 million square feet in 2017. Vacancy is declining despite this robust supply growth. The rate will likely dip below 9 percent by the end of 2017.

Retail Market

The local retail market is improving, but at a very modest pace. Vacancy has been tightening for several years, and the year-end 2017 figure was forecast to dip below 9 percent. Net absorption has been averaging approximately 2 million square feet annually for the past several years. Nearly half of this total is going into new construction projects.

Vacant big-box spaces continue to drag on retail market performance. There have been a few examples of re-tenanting of large blocks of space, highlighted by Target moving into a former Sports Authority at 16^th Street and Camelback Road.