Commercial Health in Phoenix Metro
July 21, 2014
By Michael Farrar
The Greater Phoenix office market is on an upswing with vacancies trending lower, rents inching higher and businesses adding more staff. The market continues to face some challenges; chief among them are vacancy rates that remain among the highest compared to other major metropolitan areas in the country. However, overall the outlook looks good with conditions heading in a positive direction. The following is a quick update:
Office vacancies dipped below 20 percent in the Greater Phoenix area the third quarter of 2013, ending a streak of 17 consecutive quarters where the rate ranged from 20-23 percent. Vacancy rates initially topped 20 percent mainly due to a supply/demand imbalance; tenant demand was retreating in response to the housing bust and the recession. Projects started before the onset of the recession with few, if any, tenants in place. In the past few years, the trends are now reversing. Since 2012, net absorption has outpaced construction at a pace of nearly 5 to 1, with tenants moving into a net of more than 5 million square feet. A few new projects are under construction, including single-tenant projects for State Farm in Tempe and build-to-suits for Go Daddy and GM. The 264,000-square foot third phase of the Hayden Ferry Lakeside Tempe project broke ground this year in 2014 and is one of the most prominent, multi-tenant projects currently under way. Average asking rents in Greater Phoenix have turned positive, increasing in each of the past five quarters after an extended run of quarterly dips. Rents in Greater Phoenix reached $20.61 per square foot, up 4.9 percent year over year. Asking rents peaked at year-end 2007 at $25.78 per square foot, approximately 25 percent above today’s rates. Sales activity for office buildings dipped 35 percent from the end of 2013, to the first quarter of this year, 2014. Despite the decline from the end of 2013, sales velocity in the first quarter 2014 was up more than 50 percent compared to the first quarter of 2013. Sales activity in the past 12 months has increased by 13 percent compared to year-earlier levels. Pricing continues to trend higher as the local office market strengthens. After rising 12 percent from 2012 to 2013, the median price advanced 24 percent first quarter 2014 to $108 per square foot. In first quarter 2014, 27 percent of all sales closed above $150 per square foot, up from 21 percent in 2013. Cap rates for office properties are averaging in the low- to mid-7 percent range. Rates trended lower in 2012 and 2013 but have remained largely unchanged year to date. With office vacancies declining and average asking rents increasing in each of the past four quarters, the market is showing signs of recovery. The upswing fuels some optimism about the ability to impose additional rent increases in the coming quarters – which is always good news for the commercial health in our city.
Michael E. Farrar MBA, MIM, is with Colliers International. He is the Vice President of the Greater Phoenix division. Michael can be reached at (480) 655-3321 or by email at firstname.lastname@example.org.
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