Office Demand Remains Strong in Phoenix, Though Concerns Persist
Phoenix experienced 1.8 million square feet of absorption and an overall office vacancy rate dipping to 17 percent by the end of 2019. Now that the New Year is here, the city is poised to continue its positive progression as healthcare, science, technology and the professional office service sector continue to show steady employment growth. Arizona ranked third in the U.S. with 2.6 percent job creation, as of the third quarter of 2019. That’s 74,000 new jobs for the year, including 6,900 jobs in the science and technology sector and 14,000 new jobs in the recession-resistant healthcare sector.
Companies are focused on finding cost-effective, business-friendly office environments and submarkets with access to top talent, and Phoenix checks all those boxes. Much of the state’s top talent is Millennials and Generation Z who are increasingly willing to move to lower cost of living cities that boast a high quality of life. Arizona ranked No. 1 in inbound state migration in 2018, with 273,714 inbound arrivals. We expect to see similar positive net migration numbers in 2019. The Census Bureau estimates that Phoenix will be the fourth most populous city in the U.S., with a population of 2.2 million, by the end of 2030.
By now you’ve probably heard the pun about having “20/20 vision” this year. Fortunately, you don’t need perfect vision to understand that the Phoenix office sector should continue to see strong leasing activity and absorption in 2020. Forecasts for the metro Phoenix office market in 2020 predict just under 2 million square feet of new construction, 2 million square feet or more of net absorption and vacancy rates dropping between 14 percent and 15 percent. The Greater Phoenix Economic Council assisted 50 companies in expanding to metro Phoenix between July 2018 and June 2019. This is the largest number of companies the council has helped in one fiscal year. Many of those companies had space requirements of 100,000 square feet or greater, with 20 transactions of that size or more completed in 2019.
That influx of companies with large space requirements will create a challenge for tenants looking for large blocks of existing space in Phoenix this year. Tenants in the Phoenix office market will likely see rental rates rise after an increase of nearly 5 percent in 2019. Construction cost increases and labor shortages impacting overall TI costs, which have gone up 10 percent to 15 percent since 2016, continue to contribute to rising rents. The Phoenix office market faces new challenges every year. This year will bring some blurred vision with uneasiness surrounding the national economy, political strife and upcoming election, trade wars and the possibility of an international conflict that may impact companies, delaying real estate office space decisions.
— By Larry Downey, vice chairman of tenant advisory services, Cushman & Wakefield. This article first appeared in the January 2020 issue of Western Real Estate Business magazine.