Large office tenants seeking space in Metro Phoenix are feeling the squeeze as the market tightens and big blocks of space are a scarce commodity, according to a report released today by Cushman & Wakefield of Arizona, Inc.
“Four years ago, a tenant seeking more than 100,000 square feet of office space would have more than 80 buildings in the Valley to evaluate,” says Jerry Noble, Managing Director of Cushman & Wakefield of Arizona, Inc. “Today, there are only 31 spaces of that size, within a wide variety of buildings and geographic areas. Approximately 21.8 percent of the metro area’s office space is vacant, but the vast majority of that is in small and medium-sized blocks. Class A office space is becoming the most difficult to obtain in the suburban submarkets where that product type is only 16.6 percent vacant overall.
“We are tracking nearly 20 tenants shopping the city right now with needs of 50,000 square feet and larger,” says Noble. “These tenants will likely compete for the same buildings and some will be disappointed. Inventory for these large users is limited and they need space sooner than it can be constructed in a build-to-suit or anchor tenant arrangement. We have submarkets, especially in the East Valley, where spec development would be well received, but simply is not always feasible for developers in the current financing environment.”
Approximately 4,140,036 square feet of new office space is under construction throughout the Valley, all located in Scottsdale, the Southeast Valley and Tempe. The East Valley’s Loop 101 is a focal point of leasing and development. IRGENS is developing a project at the Loop 202 and Rural called Playa Del Norte, which will include 105,000 square feet. In addition, the former Monti’s restaurant site on Mill Avenue will contain 350,000 square feet with office, hotel and retail uses. We are even seeing some innovative adaptive re-use construction, such as the old Jabil Circuit facility, which is now called The Circuit and contains 191,000 square feet of creative office space. The Offices at Viridian is slated for development near Chandler Fashion Center and will offer 246,000 square feet. Discovery Business Center in the South Tempe submarket is underway and will feature more than 800,000 square feet planned in five buildings as the project unfolds in several phases. Finally, Allred Park Place already has 92,450 square feet underway with an additional 350,000 planned by 2016.
“Nearly all of the North Tempe space is pre-leased with the exception of the new Hayden Ferry III project,” says Noble. “Of course, that Hayden Ferry phase is rapidly working its way through lease up with several notable tenants considering the project. All of our truly Class A spec projects under construction are third phases of already well established, successful developments.”
Vacancy dropped very slightly during the first three months of 2015, from 21.0 percent to 20.8 percent. The Central Business District (CBD) posted 24.0 percent overall vacancy and has experienced negative net absorption this past quarter and for the trailing four quarters. Downtown took a significant loss this first quarter, losing 101,465 square feet of absorption with three new spaces coming on line. The largest of these is a sublease space of 54,858 square feet coming on the market at 1 N. Central Ave. “We will see a shift in the CBD absorption trend in this upcoming quarter, as some sizable Midtown leases are posted in the books. These include two sizable healthcare transactions and a government service administration lease.”
Suburban submarkets posted overall vacancy of 21.3 percent at the end of March with positive net absorption of 286,686 square feet. The absorption indicates activity in the market, but was counterbalanced on a vacancy factor basis by the completion of 326,020 square feet of new space in the South Tempe and Chandler/Gilbert submarkets. The strongest overall net absorption for first quarter 2015 took place in the Southeast Valley, which has been the most active office market for nearly three years. South Tempe posted 126,325 square feet of overall net absorption as a result of several leases last quarter.
Rental rates in Metro Phoenix are slowly rising as the demand and supply equation moves toward equilibrium. Direct average asking rental rates increased during first quarter 2015 from $21.05 per square foot per year to $21.32. “Some of our more popular submarkets, such as Scottsdale and Mill Avenue in Tempe have already seen rental rate increase near 30 percent,” says Noble. “As the market improves, inevitably we will see rental growth in conjunction with supply constraints in other popular submarkets. The trend has reached the Camelback Corridor, other areas of Tempe and the remainder of Scottsdale.”
Leaders at Cushman & Wakefield anticipate the second quarter and remainder of 2015 to bring stronger net absorption than 2014. “Tightening conditions will drive rental rates up, thus motivating more tenants to lease in the cost-effective Class B product,” says Noble. “All of this will help us erode the more than 16 million square feet of vacant inventory available for lease. Vacancy rates are certain to decline further this year, but will not reach the healthy equilibrium point of 14 percent until 2016 or beyond.”