Greater Phoenix has re-cast itself in this real estate cycle. It is no longer expected to play the “boom-to-bust” role in the office sector. The metro area has definitely expanded its breadth of industries, reaching beyond homebuilding and professional services to now feature some of the country’s leading insurance corporations, technology companies and medical innovators. This diversification promises to buffer any future fall in nationwide economic activity.
Greater Phoenix continues to lead the country in job creation, adding an estimated 66,500 net new jobs between May 2018 and May 2019, marking a 3.2 percent increase. These jobs are coming from companies like Carvana, AllState and WageWorks.
Ryan Timpani, Colliers International
Phoenix has benefitted from great exposure from in the national media, which has matriculated to corporate America and attracted broad attention. The Greater Phoenix MSA boasts a phenomenal combination of attractive cost of living, growing wages and an enviable lifestyle. This package of appealing factors has allowed Phoenix to garner more than its fair share of corporate expansions and relocations throughout the Western U.S.
Demand has been strong for office space in the area. However, a diminishing availability of quality, speculative space is creating a battle for the tenants. Sizable users wanting signature spaces in submarkets like Tempe and Scottsdale are all circling around the same limited number of buildings. They are being forced to look at ancillary submarkets to accommodate their needs. As a result, Downtown Phoenix, the Camelback Corridor and the East Valley have all experienced impressive activity.
Employers continue adding workers at a very active pace. This has driven vacancy down to 13.3 percent at the mid-year point, down 30 basis points (bps) from the first quarter of 2019 and 260 bps lower than mid-2018. This vacancy decline occurred during the first half of 2019 when more than 1.4 million square feet of new space was added to office inventory. The decline in vacancy has naturally created pressure on rental rates, increasing asking rents to $25.77 per square foot at the end of the first quarter of 2019. This rate marks a 4.5 percent increase in a 12-month period.
Rent growth to date has not necessitated substantial speculative development. However, with increased user demand, we envision rents will continue to rise and more build-to-suit activity will satisfy these large corporate requirements. The appeal of the Greater Phoenix market has translated into more investment sales volume, which increased about 10 percent last quarter to $424 million across 49 transactions. The median price per square foot spiked to $172 with cap rates resting at 7.5 percent.
Phoenix’s in-migration of both residents and corporations is expected to continue at a robust pace. The quality of jobs being brought to the city is helping to drive other elements of the economy — and solidifying Greater Phoenix as one of the country’s leading places to work and live.
— By Ryan Timpani, executive vice president, Colliers International. This article first appeared in the August 2019 issue of Western Real Estate Business magazine.