Matt DePinto, Lee & Associates
The Phoenix office market ended the third quarter in a very strong position. Increasing momentum in the sector should continue into 2015. Healthier economic conditions, including a growing GDP and higher employment, are translating into increased market activity and confidence.
The biggest take-away from Phoenix’s rebounding office sector is new office development, with several high-profile construction projects underway in the East Valley.
Tower cranes dot the horizon along Tempe Town Lake in downtown Tempe. The largest project, State Farm’s Marina Heights, is under construction on its first phase, which includes two mid-rises totaling more than 1 million square feet. Additional phases will bring the project to more than 2 million square feet, making it the largest office project in Arizona. Hayden Ferry Lakeside III is under construction with a 10-story, 250,000-square-foot building on the lake. This is the third and final phase of this office project.
Arizona State University has also jumped into the mix by announcing a huge 330-acre development on the south side of Tempe Town Lake. It is expected to incorporate athletic, commercial and residential projects at full build-out that will be utilized as a funding source for ASU Athletics. USA Place, a $400-million-plus development in downtown, will house the new headquarters for USA Basketball. The mixed-use project will feature office, retail, housing and a luxury hotel. Plans were also recently announced for a multi-use project called Hayden House Tempe, built on the spot of the original Tempe town site. This $200-million office/hotel project will preserve the original Hayden House building that was built in the 1870s.
Chandler is another active development submarket. This region has become a prime choice for tech companies and many others looking to reside along the Loop 101/202 Corridor.
Nearly 7 million square feet of office projects are planned for development in this area. With 700,000 square feet under construction and nearly 300,000 square feet already delivered in 2014, this sector should continue its robust pace.
Overall market vacancy has dropped an additional 50 basis points to 21.6 percent, the lowest level since the third quarter of 2008, or the start of the Great Recession. Since then, more than 6.5 million square feet of office space has been added to Phoenix’s office inventory. Year-to-date net absorption stands at 1.8 million square feet for 2014; it will surpass last year’s total. Full-service asking rents remain below historic levels, but are increasing modestly each quarter. Lease rates increased overall by 1.3 percent in the third quarter, with Class A rents rising the most, by 3.2 percent. Three projects totaling 574,262 square feet were also delivered to the Valley-wide inventory this past quarter.
Property sales continue to be active as investment portfolios search for key assets. GE Capital and Hines are the largest buyers in the Phoenix market so far this year.
The Phoenix office market continues to rebuild and reposition itself as the strengthening economy brings new opportunities for growth. While there are still factors keeping Phoenix from its full potential, such as slower-than-expected population growth, the sector is becoming healthier overall with realistic expectations and attention to market fundamentals that will ultimately prove successful in the long run.
By Matt DePinto, Senior Research Analyst at Lee & Associates. This article originally appeared in the December 2014 issue of Western Real Estate Business magazine.