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Is Perception Really Nine-Tenths of Reality in Phoenix's Office Market?

The answer to that question is both yes and no. For some institutional investors and developers, perception is all that matters. And their perception of the metro Phoenix office market is “we’ll pass – for now.” Driving this perception is the 23 percent office vacancy rate reported by major brokerage firms in their recent quarterly market reports.

But perception and reality are not always the same. Drilling down into the data reveals that certain submarkets have vacancy rates in the low single digits, and the size of available vacant space differs from what users in the market want. What cannot be determined from quarterly market reports is just how much space suffers from functional obsolescence.

Numerous buildings sit vacant – even during good economic conditions – due to poor location, not enough parking, inadequate power, deferred maintenance and numerous other deficiencies. Most office brokers believe that at least 5 percent to 7 percent of vacant space is in obsolete buildings. Assuming that is true, why are good, quality buildings still 16 percent to 18 percent vacant?

The majority of office vacancy is composed of smaller, non-contiguous, spaces. Due to lingering uncertainty in the overall economy, most small- to medium-size businesses are unwilling to budget for more than a few months in advance. This restrains thousands of firms from hiring and expanding even though many of them would like to. Therefore, numerous office spaces of less than 10,000 square feet remain vacant.

Conversely, larger firms that are expanding or consolidating several locations want larger contiguous space located in the most desirable submarkets so they can attract people with the skills they need to fill their jobs. However, if they want an existing building for, say, 40,000 square feet in a desirable submarket like Chandler’s Price Corridor, where the office vacancy rate is below 4 percent, there are maybe one or two options in older Class B or C buildings. There are few large blocks of space in quality office buildings in desirable submarkets.

For this reason, The Rockefeller Group will break ground soon on a speculative 82,000-square-foot office/flex building at its Chandler Corporate Center campus. Located near Intel and the Price Corridor, it is scheduled for completion by mid-2014. The campus includes Broadcom, Garmin, Element Payment Services, Creative Leather and other tenants.

The slow pace at which vacant office space is being absorbed reflects the slow pace of the national economic recovery. As uncertainty about major economic factors such as health insurance premiums, interest rates, the national budget and other issues become less disruptive, small- and medium-size businesses will start hiring again. They will also move forward with their long-delayed expansion plans.

The time will come when even smaller office spaces in desirable buildings will be in short supply. Almost no speculative office buildings are being developed, except in the most desirable sub-markets, and very cautiously at that. We are approaching the start of the next up cycle in the Phoenix office market. Then perceptions will change and be, in fact, nine-tenths of reality.

Mark Singerman, Regional Director – Arizona, Rockefeller Group Development Corporation. This article appeared in the Feburary 2014 issue of Western Real Estate Business magazine.

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