Tech Takes Hold in Phoenix
One of the newest trends in Phoenix office leasing is the spur in technology and creative space requirements, especially for tenants moving in from Northern and Southern California. These companies are searching for a more favorable market — one with lower labor costs and rental rates, more affordable housing, an educated workforce from which to draw, less traffic and an overall higher quality of life — and the Phoenix area fares well comparatively. I expect this trend to continue, especially in the downtown markets of Phoenix, Tempe and Scottsdale.
Strong leasing activity throughout the Phoenix market this year resulted in robust absorption, with Class B product leading the way. There are numerous large tenants currently in the market seeking to lock up space, which will keep demand elevated throughout the remainder of the year. Healthcare and financial services industries are committing to the market, especially with larger-scale operations centers. Parking needs for these users are 6:1000 and greater.
Tempe remains a hot spot for development, with two new high-profile speculative projects underway — the Grand at Papago Park Center (213,055 square feet) and 2100 Rio Salado (102,819 square feet). Two new buildings were completed this quarter at Tempe’s Marina Heights development, home to State Farm’s 2-million-square-foot regional headquarters. This project has drastically changed the landscape of Tempe, gaining national exposure for the area. Companies including Northern Trust Bank, SAP, Zenefits and Willis Towers Watson have also expanded into Tempe, many of them bringing a net job increase to the Phoenix area.
Increased absorption and limited speculative construction are playing their parts to increase rental rates with core markets like downtown Tempe, Chandler/Gilbert, Downtown Phoenix, Camelback, Scottsdale and North Scottsdale experiencing the highest rental growth, with some key buildings having asking rates ranging as high as $38 to $40 per square foot. While concessions are still negotiated in every deal, usually in terms of free rent, landlords in tightening markets are scaling back on concessions for prime space. Tenant improvement and construction costs are also on the rise, another trend which will continue in the coming months.
Economic conditions continue to improve as Phoenix is witnessing steady job growth overall in the metro area, adding 58,700 jobs over the past 12 months for an annualized job growth rate of 3.1 percent. This rate ranks seventh nationally, behind Riverside-San Bernardino and ahead of Denver. Nine of the 11 employment sectors posted year-over-year job gains, while overall office-using employment grew at a more robust 4.7 percent. It was particularly strong in the information sector, which grew 6.2 percent. Forbes recently ranked Phoenix third for information-sector job growth since 2010, behind San Francisco and San Jose.
Looking forward, market demand coupled with impressive job growth will keep vacancy levels trending down. The region’s strong job growth, combined with continued healthy population gains and relative affordability, are strong indicators that the local economy will continue to thrive.
— By Mike Garlick, Senior Managing Director, Newmark Grubb Knight Frank. This article first appeared in the September 2016 issue of Western Real Estate Business.