Valley Office Market Led by East Valley

PHOENIX—Two words tell the story of the 2014 Metro Phoenix office market: East Valley. The Tempe, Scottsdale and Chandler submarkets outperformed the entire Valley, helping to pull the city back to real estate health, according to figures released by Cushman & Wakefield of Arizona, Inc.

“The Scottsdale and Southeast Valley office corridors have benefitted from incredible leasing activity from a variety of users ranging from insurance companies to tech firms,” says Jerry Noble, managing director of Cushman & Wakefield. “2014 was the strongest year of the recovery, with more leasing activity and a depletion of large blocks of space. These are key indicators of cyclical shift and progress towards equilibrium.”

Noble tells GlobeSt.com millennials are definitely changing the way office space is approached: “By 2020, half of the workforce will be millennials. They are eating three meals a day at work and not working nine to five—they're working nine to eight, and they're looking for that live, work play environment in urban areas. They want the barbecue pits, the green space, the creative space, the community space. Recruiting is a main decision in the marketing process these days. Old Town Scottsdale and the north end of Mill Avenue are two of the hottest markets for millennials right now, but those are small markets. That's pushing for companies to look for space along the 101 and in the Southeast Valley. ASU is obviously a huge driver which anchors the Southeast Valley. Phoenix will benefit from the millennials as the boomers retire. In the next five years, the housing market will begin to change as the lives of millennials change, as they start families and begin looking for their first homes. The bottom line is that every user in the market is moving toward newer, open concept, creative spaces. In all industries you are seeing some change.”

Overall net absorption for 2014 totaled 1,746,808 square feet, with nearly 1.5 million of that net absorption taking place in the Scottsdale and Southeast Valley areas. Not surprisingly, the two East Valley areas were also the locations of most new projects completed and under construction. According to Cushman & Wakefield's first quarter 2015 podcast: US Economic Outlook and Quarterly Review for Office and Industrial, Metro Phoenix is a prime illustration of a broader, national trend among occupiers—largely tech-related tenants—driving demand across U.S. CBDs.

The overall vacancy rate in Metro Phoenix finished 2014 at 21.9%, up slightly from a year ago when it was 21.7%. “True Class A office product in the most prestigious submarkets are now highly occupied and nearly sold out,” says Noble. “As inventory is depleted in the Scottsdale, Tempe and Camelback Corridor submarkets, nearby areas such as the Central Business District (CBD) and the I-17 Corridor will start to become more popular.” Strong conditions can be found in the Airport Area with 15.1% overall vacancy and Scottsdale with a higher 18.4% figure. Other areas, such as the Central Business District with 23.0 % overall vacancy and North Phoenix with 29.8%, will benefit from the city's overall growth in leasing that is anticipated this year.

During 2014, construction reached its highest point since 2010. By year-end Metro Phoenix posted approximately 719,690 new square feet completed with another 2,410,117 square feet underway. Two major class A spec projects were started last year – Hayden Ferry Lakeside III and Scottsdale Quarter – both are third phases of already successful developments. Allred (in Chandler) and Liberty Property Trust (in Tempe) also broke ground in 2014. All of the completed space and property under construction is situated in Scottsdale, Tempe or Chandler/Gilbert. “It is clear that developers are satisfying existing demand and being judicious about building in highly desirable areas,” says Noble. “The East Valley and Loop 101 locations continue to be in high demand, especially from tech related companies.”

The strong activity of 2014 had little to no effect on Valley-wide rental rates in the Metro Phoenix office market. Year-end statistics show that the direct weighted average rental rate throughout the city was $21.05 per square foot per year, compared to $20.60 a year ago.

“Areas that offer appealing lifestyle amenities experience the strongest boost in rental rates,” says Noble. The live, work, play areas of Mill Avenue and Old Town Scottsdale experienced dramatic rent increases in 2014, some upwards of 30%.”

The office property sales volume dropped in 2014, with just 73 assets changing hands, compared to 90 in 2013. Approximately 60 of the sales in 2014 were investor-driven, while 13 of the transactions involved users purchasing properties. Notable Metro Phoenix office sales included 1501 W. Fountainhead Pkwy for $71 million; 20410 N. 19^th Ave., for $51 million and 7600 N. 16^th St. for $25 million.

“This year will bring more capital to the Phoenix market,” says Noble. “Investors looking to park their money in real estate will be seriously evaluating Phoenix because the coastal markets of San Diego, San Francisco, Los Angeles and Sacramento have become too expensive.”

Cushman & Wakefield predicts that that 2015 will bring even stronger net leasing than the dynamic 2014 figures. “The nation's unemployment is at a seven-year low and consumer confidence is at an 11-year high,” says Noble. “Low energy prices also will have a positive impact on Phoenix. These national factors, along with incredible enthusiasm in the Phoenix business community will further drive our real estate economy in the upcoming months.”

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