Phoenix’s Office Market Encounters Slow, Steady Recovery

Tyson Breinholt, Commercial Properties Inc./CORFAC International

Tyson Breinholt, Commercial Properties Inc./CORFAC International

After muddling through the post-recession with office vacancy rates stuck around 20 percent for the overall Phoenix office market, the office sector has begun to show elements of stabilization in the Valley of the Sun.

The unemployment rate in Phoenix plummeted to 5 percent in April this year, down from more than 11 percent near the end of 2009.

The overall office vacancy ended the first quarter of this year at 17.2 percent. Second quarter figures were not available at press time, but my colleagues and I think it will dip below 17 percent at mid-year. If it does, the vacancy rate will have dropped nearly 300 basis points over the previous 24 months.

The submarkets with the lowest vacancy rates are the usual suspects in our marketplace: Scottsdale (11.2 percent), 44th Street Corridor (aka Camelback Corridor at 11.6 percent) and Tempe, which houses the main campus of Arizona State University (12.7 percent).

The slow and steady recovery makes for a healthier market than boom and bust swings. Some of the region’s larger office occupiers have expanded in recent years, which account for a substantial amount of office space absorption. A short list of growing companies with significant footprints here includes State Farm, First Solar, Lincoln Property Trust, GoDaddy, General Motors, Laser Spine Institute and Zenefits.

Demonstrating that Phoenix remains attractive to technology tenants, Amazon, eBay (PayPal) and Shutterfly have recently opened new regional offices in the Phoenix area.

State Farm is also involved in two of the largest office developments currently under construction by Ryan Companies and Sunbelt Holdings at the Marina Heights mixed-use project.
The insurance company has pre-leased more than 1 million square feet on Rio Salado Parkway. It is purportedly pulling some employees out of its current location at Fountainhead Corporate Park in Tempe, and has already shuttered its big campus in Northern California’s Rohnert Park. Some of those people may very well relocate to Phoenix.

Marina Heights will contain about 2 million square of office space with about 60,000 square feet of retail space, upon completion. Phase I is expected to be completed later this year, with the final phase slated for completion in 2017. State Farm plans to occupy buildings A, B, C, D and E for its Southwest regional hub.

There is also about 3 million square feet of office space being built speculatively – though as everyone in this business knows, some of the spec space may actually be in projects where some pre-leasing is taking place.

The demand for spec space is strictly for Class A product. Of the 25 million square feet of office space available in the market, about one-third of it is Class A (7,082,935 square feet). That space can be absorbed relatively quickly in an active market, particularly from move-up tenants sensing that the market is shifting toward equilibrium. Rents are likely to rise as the market tightens. Those companies in Class B or C spaces may make a move toward better locations and buildings with enhanced interiors.

Speaking of rents – they have been mostly flat in the past 18 months. Though some landlords have increased their rental rates in the improving market, many landlords have instead been removing concessions from lease terms, or at least have modifying them to be less favorable for tenants.

Overall office rents ended the first quarter at $21.3 percent per square foot, while Class A rents averaged $25.36 a foot. Class C office rents, subject to the location, ranged from $10 a foot to $15 a foot. It is quite normal in the Phoenix marketplace for rent deltas to move in $5 per foot increments from one class of space to another.

By Tyson Breinholt, Partner/Associate Broker, Commercial Properties Inc./CORFAC International. This article originally appeared in the August 2015 issue of Western Real Estate Business magazine.

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