Greater Phoenix Office and Industrial Markets Report Lower Vacancy, Positive Absorption, Rising Rents in First Quarter 2016

Colliers International in Greater Phoenix released its Office and Industrial Market Reports for first quarter 2016. Report highlights are outlined below. For more details, refer to the attached reports or view online: office and industrial.

 

Office Market Highlights

 

The Greater Phoenix office market got off to a steady start during the first quarter. Net absorption was positive, vacancies ticked lower and rents rose. Further strengthening is likely in the months ahead, as employers continue to expand payrolls. Employers added more than 70,000 new jobs in 2015—the strongest calendar year of growth since 2005—and similar gains are forecast for 2016 and 2017.

 

  • Vacancy ended the first quarter at 17.2 percent, 110 basis points lower than one year ago. During the past 12 months, vacancy has declined in 22 of the 25 submarkets in Greater Phoenix.

 

  • Rents are pushing higher in response to consistent tenant demand and tightening vacancy. Asking rents have increased by 5.3 percent in the past 12 months, reaching $22.68 per square foot in the first quarter.

 

  • Sales of office buildings slowed by approximately 20 percent from the end of last year to the beginning of this year.  The decline in activity frequently occurs during the first quarter. The median sales price was $119 per square foot, compared to $130 per square foot in 2015.

 

Despite the recent slowdown, transaction velocity should be strong in 2016. Building sales are ahead of the 2015 pace, property fundamentals are improving and interest rates have declined. As long as interest rates remain near their current levels, investment activity should continue at a healthy pace.

 

Vacancy is expected to continue to improve in 2016. The rate is forecast to decline 110 basis points this year to 16.2 percent. This would mark the sixth straight year of vacancy improvement in the local office market.

 

Industrial Market Highlights

 

The first quarter was an active period for both supply and demand growth in the industrial market. Some of the persistent demand is being driven by accelerating job growth, which has been widespread across industries, with the construction segment posting the fastest rate of expansion.

 

  • Vacancy ended the first quarter at 11 percent, 70 basis points lower than one year ago. This is the lowest local vacancy rate since 2008.

 

  • Net absorption totaled more than 1.6 million square feet in the first quarter. This was the 11th consecutive quarter of positive net absorption and the 8th time in that span where the figure topped 1 million square feet.

 

  • Industrial construction accelerated in the first quarter, with more than 2 million square feet coming online. In the past 12 months, total new construction has totaled approximately 5.3 million square feet.

 

  • Asking rents are pushing higher, rising 6.7 percent year over year, with much of the rent growth recorded in the past six months.

 

  • While sales activity slowed in the first quarter, prices rose. The median price reached $80 per square foot, 14 percent higher than the 2015 median price.

 

Developers will continue to deliver a mix of spec and build-to-suit projects throughout many regions in the Valley. In the past two years, tenant move-ins have outpaced new supply by nearly 3 million square feet, driving down the metrowide vacancy rate. In 2016, this trend should continue, with net absorption forecast to exceed new construction by approximately 2 million square feet.

 

The past two years have been quite active in the local industrial investment market, and that trend should continue in 2016. While vacancies have been trending lower for the past few years, rents have only recently begun to gain momentum higher over the past 12-18 months. Assuming rents continue to advance at a healthy clip, building sales should remain fairly active.

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