Phoenix Office Market Strengthens Despite Slowing Job Growth

Colliers International in Greater Phoenix released its third-quarter 2016 Office Market Report for Greater Phoenix.  Report highlights are outlined below.  For more details, refer to the attached report or click here to view online.

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  • Greater Phoenix posted a strong 930,000 square feet of net absorption during the third quarter. This marks the 13th consecutive quarter for positive net absorption in the city.
  • Vacancy throughout all classes of space has decreased to 16.3% with some submarkets dipping below 15%.
  • Employment growth in Greater Phoenix has slowed to an annual pace of approximately 2.2 percent at the end of 3rd quarter, which is down from 3.5 percent a year ago. Despite the slower job growth, companies continue to expand in the office sector.
  • Rental rates are on the rise, increasing more than 5% in the past 12 months to $23.22 per square foot. A few submarkets are recording double-digit annual rent gains.
  • Investment activity increased in the third quarter and sales for 2016 are closely tracking to 2015 levels. The median price in the 3rd quarter was $141 per square foot, bringing the year-to-date median price to $130 per square foot.  The 4th quarter is typically robust in the investment sales sector, so a strong finish to the year is expected.
  • Developers delivered approximately 470,000 square feet of new space to the market during 3rd More than 1.8 million square feet are currently under construction, with approximately 1 million square feet of those being speculative space.

 

According to Colliers International of Greater Phoenix, demand for office space is expected to remain healthy through this year and further strengthen in 2017.  Net absorption is being driven by employment growth, which has slowed somewhat, but remains positive.  The steady tenant demand has driven down vacancy rates and pushed rental rates higher.  Rent growth should continue for several more quarters as the overall market vacancy approaches the 15% range.  As inventory is absorbed, we are experiencing more modest construction activity than in previous recoveries.  This will help prevent the market from becoming overbuilt.

 

Investment activity will remain healthy for the remainder of 2016 with a big push at the end of the year.  Strengthening market fundamentals are attracting more investors to the market. Cap rates have remained essentially flat in 2016, averaging in the mid7% range.  Prices are trending higher in response to demand.  interest rates remain low and no clear signals of an increase are on the near horizon.

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