The investment climate for the Phoenix office market is poised to provide compelling acquisition opportunities in 2013. Favorable job growth, improving market fundamentals and assets available at discounts to replacement costs are expected to enhance asset appreciation over the next several years.
Phoenix has historically generated strong job growth after recessionary periods. Recent data supports this trend, as Metro Phoenix added 50,700 jobs over the past 12 months, according to the Bureau of Labor Statistics’ preliminary November 2012 figures. This job growth has lowered the unemployment rate to 6.9 percent as of October 2012, well below the national rate of 7.9 percent.
The area is expected to continue adding 50,000 new jobs annually through 2015, driving vacancy rates downward and creating upward pressure on rental rates and property values. Employment growth in professional and business services, and in the financial sector, is of chief importance as a demand generator for office space.
Phoenix has also benefited from strong population growth. Metro Phoenix is expected to grow at an average rate of 2.6 percent per year over the next 10 years, a pace that is more than twice that of the national average. Affordable housing, a business-friendly environment and a well-educated workforce are the growth drivers.
Yes, the office market continues to show signs of recovery. Phoenix has now recorded three consecutive years of positive net absorption through the end of 2012, according to Cushman & Wakefield. Nearly 75 percent of all submarkets experienced positive net absorption last year, with certain submarkets leading the way. Strong leasing activity in North Tempe pushed direct submarket vacancy rates down to 10.3 percent, while vacancy rates for office/flex space in the Scottsdale Airpark submarket fell to 9.2 percent from a peak of 18.1 percent.
These improving fundamentals were one of several factors behind a Scottsdale value-add acquisition that was carried out by Buchanan Street Partners this past December. The company acquired a 66,000-square-foot office building in Perimeter Center for $66 per square foot, well below the estimated replacement cost of $165 per square foot. Buchanan plans to buy $100 million of assets in the Phoenix market over the next 12 months.
Future tenant demand, coupled with limited new development, should serve as a catalyst in the Phoenix office market’s recovery. In anticipation of the recovery, the coming year should continue to present attractive buying opportunities as market fundamentals improve and asset pricing remains discounted compared to replacement cost.
— Tim Ballard, president, and Brian Payne, executive vice president, Buchanan Street Partners