Greater Phoenix Office Market Improves Despite Slowing Job Growth

The Greater Phoenix office real estate market finished 2016 with positive momentum, despite year-end reports of slowing job growth.  The market vacancy rate dropped to 16 percent, the lowest figure seen since 2008.  A full copy of the Colliers in Greater Phoenix office market report can be accessed by clicking HERE.


Net absorption of Phoenix office space topped 930,000 square feet in the fourth quarter, bringing the 2016 total to more than 3.5 million square feet.  Net absorption in the city’s office sector has been positive in each of the past 14 quarters.


Vacancy at the end of the year dropped to 16 percent, down 110 basis points from a year ago.  This trend has held steady since 2012, as the city has improved by an average of approximately 100 basis points per year.  Quarterly leasing activity was steady throughout much of 2016.  The largest lease of the year was signed during fourth quarter, when ADP committed to 225,000 square feet at the former US Airways facility in Tempe.


The absorption growth and vacancy decreases have taken place despite a slowing in job growth.  Metro Phoenix experienced high-profile expansions and announcements from companies like ADP, Zenreach and Northern Trust.  After job expansion of nearly four percent in 2015, the local employment market grew by less than 1.5 percent in 2016.  The office-using sectors grew by approximately one percent in 2016 after posting a gain of nearly five percent in 2015.  Growth is predicted to accelerate in 2017 and the market could see a significant boost if single-family housing starts push higher in the year ahead.


Declining vacancy and impressive net absorption has pushed average asking rental rates up to $23.50 per square foot in the fourth quarter, which is 5.1 percent higher than a year ago. The fourth quarter marked the 15th consecutive period of positive quarterly rent growth. Rents are rising across all property classes, which indicates improvement throughout the marketplace.


Approximately 547,000 square feet of new office space came online in fourth quarter 2016, up from approximately 460,000 the prior quarter.  Developers brought nearly 2.4 million square feet of inventory online during 2016, which was a decline from 3.1 million square feet in 2015.  The final building of the 2.1-million-square-foot Marina Heights project in Tempe for State Farm will be completed in 2017 and several spec projects in the Tempe market are planned or underway for this year.


The office investment market showed a great deal of consistency in the fourth quarter of 2016, compared to a spike in large transactions at the end of 2015.  The fourth quarter saw a strengthening in office investments, even as interest rates rose.  Prices rose and cap rates compressed as 2016 closed.  The median price for a sale during fourth quarter 2016 was $145 per square foot, up from $141 per square foot in third quarter.  Prices were approximately eight percent higher in 2016 over 2015.  The average cap rate for 2016 was 7.6 percent, unchanged from the 2015 average.


The Greater Phoenix office market is expected to continue improvement during 2017.  Supply and demand growth in this cycle have been far steadier than during previous market expansions.  This suggests that our “boom and bust” history may be shifting to a less volatile path.  It is important to monitor the growth of office jobs, as continued slowing of employment expansion could put a drag on future demand for office space.  The improving market fundamentals are supporting a healthy investment market, which is predicted to remain robust in 2017.  While interest rates rose by approximately 85 basis points in the fourth quarter, sales velocity and pricing both ticked higher towards year-end.  Rising interest rates might lead to higher cap rates in future months, but so far those increases have not impacted our investment conditions.


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