By Phil Breidenbach, Senior Executive Vice President, Colliers
Companies are coming back to the office in Phoenix. Businesses are envisioning the return of their workforce as many look for new space or reconfigure their existing facilities. Building owners feel the momentum. We have reason to be optimistic — the future of the office and how we use the workplace is exciting! Getting there, however, will be turbulent. Your patience may be tested.
Colliers’ fourth-quarter office report shows vacancies stabilizing market wide, positive absorption occurring in key submarkets and rents increasing marginally.
Phil Breidenbach, Senior Executive Vice President, Colliers
Positive fourth-quarter absorption was led by leasing in new Class A+ buildings like 100 S. Mill. This Hines/Cousins project is 80 percent leased by institutional, “household name” tenants at record rents several months prior to completion.
Vacancy rates may, however, continue to fluctuate as certain downsizing continues. Some institutional users are adopting work from home for much of their workforce, convinced this strategy will help with employee retention and cost reduction without impacting productivity — assumptions yet to be proven. This strategy has corporate America subleasing space, allowing leases to expire and vacating spaces, which is stagnating recovery.
‘Short Term’ — The Renewal Mantra for 2022
We speak with office occupiers
regularly about back-to-work strategies. Their responses are overwhelmingly similar: “I don’t know. What is everybody else doing?” This mindset led to a market-wide short-term, as-is, in-place renewal strategy. While painful for many landlords (and their agents), this as an opportunity. Rental rates are stable (increasing in certain areas) and as companies come back to work and realize they need office space long-term, this abundance of tenants without long-term commitments will create demand for landlords, raising rents for the next few years.
Buyers aren’t Afraid to Pay
Uncertainty and apprehension notwithstanding, investor demand for office buildings is robust. Stabilized office buildings continue to trade, highlighted by the sale of Block 23 downtown by RED Development, which sold the 307,030-square-foot office building for $488.55 per square foot. The $400 per square foot barrier has been surpassed in the Tempe submarket as well. While record per square foot prices are realized, reported cap rates are 150 to 250 basis points higher than sales of industrial buildings of similar class/credit, which could be an opportunity for investors.
Older, well-parked suburban office buildings are in high demand as well…for conversion to industrial. As industrial sites become tougher to find, developers look closely at office buildings/land for industrial redevelopment — reducing supply and providing a slight occupancy boost to the Class B office market.
Bottom Line: We’re Better Together
Cities evolved because we realized humans accomplish more and are happier together. As companies struggle with their environments and their workforces demand to stay home, it’s easy to forget we’ve spent the past thousand years coming together in places where we connect and get more done. Greater Phoenix is proof this trend continues.
The next few years will be exciting, but the outcome will enhance the lives of our workforce. Opportunities abound for office building developers to redefine the workplace, establish environments that attract talent, create FOMO and develop the “third place” (this market has proven tenants are willing to pay for this.) Tenants now have the chance to grow their enterprise and attract talent by creating environments for growth and profit.