Greater Phoenix Office Vacancy Inches Higher with New Development

The Greater Phoenix office market remained strong in the first quarter of 2017 with positive net absorption and rising rental rates, according to a report released today by Colliers International in Greater Phoenix.  Vacancy rose slightly during the first three months of this year, responding to heightened development activity. You can access the full report by clicking Here.

 

Vacancy ended the first quarter at 16.5 percent, 30 basis points higher than year-end 2016.  Despite the uptick, vacancy in the city remains 70 basis points below the same time last year.  This is likely a short-term disruption in the market’s improvement cycle as the delivery of new supply accelerated during the first three months of this year.

 

The market increased by 1.2 million square feet during the first quarter, including the delivery of the final building of State Farm’s facilities at Marina Heights in Tempe. The Tempe submarket has posted one of the lowest vacancy rates in the metro area for the past several years and is leading the city in new development.  More than 300,000 square feet of new spec office was delivered in Tempe during the first quarter and additional projects are likely to break ground before year-end.

 

Net absorption in the Phoenix office market totaled approximately 830,000 square feet during the first quarter of 2017.  This extends the market’s trend of averaging 800,000 square feet of absorption per quarter during 2016.  This is the market’s eighth consecutive quarter of positive net absorption.  The Airport Area posted net absorption of 198,000 square feet during the first three months with nearly 70 percent of that taking place in two large spec building leases.

 

Rental rates in Greater Phoenix are rising at a consistent pace, reaching $23.76 per square foot in the first quarter 2017.  Rates have increased each of the last four years and the most recent rates mark a 4.5 percent increase from a year earlier. Rents are expected to trend even higher as vacancy tightens.  Asking rents are expected to gain approximately five percent during 2017, building on the six-percent increase experienced in 2016.

 

The Greater Phoenix investment sales market for office buildings slowed a bit in the first quarter of 2017.  The median price per square foot dropped, but cap rates remained relatively unchanged.  The decrease in price reflects the assets that changed hands in this timeframe, rather than a movement in market sentiment. The investment market has remained consistent and the forecast for continued demand and rising rates indicates we will post price increases for the fifth consecutive year.

 

The improvement cycle of Phoenix is expected to post further gains for the remainder of 2017.  The market is in the later stages of recovery, however, meaning that there could be a few quarters of softer conditions over the next 18-24 months.  Population-serving sectors will likely drive growth in the coming quarters.  The population in Greater Phoenix is forecast to grow by more than 100,000 residents annually for the next few years. Housing, education, healthcare, financial and other professional services industries are expected to drive this population and job growth.  Investment sales should remain healthy, despite the anticipation of more interest rate hikes.  While borrowing costs will rise, the main driver of investment performance is the operating fundamentals of the properties.  Continued absorption and rental rate increases will strengthen those fundamentals.

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