Metro Phoenix Posts Lowest Office Vacancy Since 2008

Cushman & Wakefield announced today that the Metro Phoenix office market posted the lowest office vacancy since Q2 2008.

At the close of Q3 2016, office vacancy in Metro Phoenix stood at 17.8%. A 20-basis-point (BP) decrease from the 18.0% rate that was in place just three months ago, and a staggering 110 BP drop from the 18.9% reading at the close of Q3 2015.

“The Metro Phoenix office market continued to experience robust demand during Q3 2016, absorbing over 1.1 million square feet (MSF) and bringing the year-to-date total to over 2.8 MSF,” says Curtis Hornaday, Associate Market Director of Research with Cushman & Wakefield. “This marks the second largest Q3 year-to-date net gain of all time.”

Occupancy growth took place in 14 of Metro Phoenix’s 22 office submarkets in Q3 2016. The Tempe North submarket overshadowed all other submarkets during Q3 with over 733,000 square feet (SF) of net absorption, which accounts for 66.5% of all occupancy growth for the entire market in Q3 2016. Tempe North’s net gain is due to State Farm moving into the third and fourth buildings of their five-building regional headquarters. The Camelback Corridor and the Price Road Corridor submarkets followed with over 134,000 SF and 122,000 SF of net gains, respectively, in Q3 2016.

New tenant activity has continued to accelerate since the beginning of 2016, with numerous large sized requirements in excess of 75,000 SF looking for space in the Metro Phoenix market. “Year-to-date, at least five California-based organizations announced they would be expanding operations into the Metro Phoenix market. This is due in large part to operational costs in Greater Phoenix being up to 40% less than California,” said Chris Walker, Vice President with Cushman & Wakefield.

During Q3 nearly 998,000 SF was added to the local inventory, 64.2% of which came online preleased in the form of build-to-suit (BTS) projects. Through the first three quarters of 2016 developers have added just under 2.2 MSF of new product to the Metro Phoenix office market. Of the nearly 2.2 MSF delivered in 2016, 61.3% (1.4 MSF) occurred in the Tempe North submarket.

In regards to new construction, two Class B speculative projects broke ground totaling over 192,000 SF in Q3 2016. “With speculative construction on the rise, one of the two new projects is located in the Sky Harbor submarket, which has not experienced speculative development since 2008,” according to Hornaday.

Metro Phoenix’s direct average asking rent continues to rise with a current rate of $24.08 per square foot (PSF), on an annual full service basis. This is the first time the direct average asking rate has been above $24.00, since Q2 2009. This marks a 1.9% increase from the Q2 2016 reading and a staggering 6.1% increase when compared to Q3 2015. The Price Corridor ($24.59 PSF) and Scottsdale South ($31.91 PSF) submarkets recorded the largest quarterly gains in Metro Phoenix, increasing 7.3% and 5.0% respectively. Not only did the Scottsdale South submarket post the second largest gain during the third quarter of 2016, but it also recorded a direct average asking rate increase of an astonishing 15.2% from the Q3 2015 reading of $27.69 PSF.

The Camelback Corridor ($35.44 PSF) and Scottsdale South ($31.58 PSF) submarkets remain atop all others in regards to the direct average rate for Class A space. Despite having the highest Class A rates in Metro Phoenix, Cushman & Wakefield tracked just under 232,000 SF of combined leasing activity for Class A space in these two submarkets during Q3 2016.

“With over 2.8 MSF of absorption during the first three quarters of 2016, the Phoenix office market now ranks second out of the 87 markets Cushman & Wakefield tracks,” added Hornaday. “The only market currently out preforming Phoenix in terms of occupancy growth is Dallas/Fort Worth, also located in the western region.”

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