CBRE Research has released its Q4 2016 Phoenix Office MarketView report, and overall the Valley’s office market finished the year much the way it started – with strong momentum and healthy lease activity.
Driven by improving economic fundamentals and steady job growth, demand from office users can be seen in the significant amount of net absorption reported in 2016. Additionally, healthy demand coupled with a limited amount of completed construction, vacancy rates declined and rents increased across the Valley.
“The Valley continued to see relocation- and expansion- related headlines in 2016,” said Senior Vice President Bryce Terveen. “Metro Phoenix is on corporate America’s radar as a market that offers affordable operating costs, top-tier talent, and a high quality of life. In 2016, CBRE Research tracked 72 company announcements that, if they all come to fruition, will total 16,500 net new jobs for the Valley.”
Terveen noted that typically these projections are totaled over a three- to five-year period. However, he points the long-term success of companies like Yelp, which has continued to grow and add hundreds of jobs since first locating in Scottsdale in 2001, as a possible indictor of other firms’ future success in meeting their employment needs in the Valley. He expects both job growth and office fundamentals to continue to improve across the metro area in 2017.
Top-level market highlights from Q4 and 2016 overall include:
- Net absorption Valley wide totaled 414,670 sq. ft. in Q4 bringing 2016 totals to 3.2 million sq. ft. of positive net absorption.
- Demand was balanced across the market with 80 percent of all submarkets recording positive net absorption. The highest Q4 net absorption was recorded in South Tempe/Ahwatukee, Midtown and Chandler.
- Vacancy closed 2016 at 17.4 percent, which was 30 bps lower than Q3 2016 and a full 200 bps decrease year-over-year. Submarkets with the tightest vacancy included Tempe at 6.7 percent and Central/South Scottsdale with 13.4 percent.
- Full service gross asking lease rate for existing product continued to rise, ending 2016 at a Valley wide average of $24.30 PSF. Year-over-year the market saw the average asking rate increase 6.1 percent.
Examining office development trends across metro Phoenix, a notable amount of build-to-suit (BTS) construction was underway in Q4 2016. Of the 1.7 million sq. ft. under construction at year-end, over 1.1 million sq. ft. consisted of BTS product. Meanwhile, speculative development was down 26.5 percent year-over-year. However, while the construction pipeline is below historic averages, there is a notable amount of space being repositioned for office use. Roughly 930,000 of the 1.2 million sq. ft. of product under renovation is back office/flex space.
“Office development and redevelopment kept pace with user demand throughout the year and supply/demand balance was key to improved fundamentals quarter-over-quarter,” said Senior Associate Michael Strittmatter.
He continued, “The market continues to lack big blocks of quality available space in certain submarkets and most of the new, speculative development in these submarkets has leased quickly. As such, the uptick in redevelopment and repositioning of space in 2016 indicates that tenant demand, particularly for immediate occupancy options, is outpacing the amount of available land sites for speculative development.”
Overall, the Phoenix metro economy is expected to see healthy levels of growth in 2017. An improving labor market underpins this outlook and barring any major external shock, job growth is projected to continue its improvement. As for the impact to office markets, while the broad outlook is favorable across the Valley, the Tempe, Camelback Corridor and Scottsdale submarkets are expected to generate the highest levels of activity due to their desirability in terms of walkability and abundance of amenities.