PHOENIX—Metro Phoenix office market posted its strongest quarter of absorption in since 2005 with 1.5 million square feet during fourth quarter 2015. The year closed with a total 2015 absorption of 3.3 million square feet and occupancy growth in 17 of the 22 metropolitan submarkets during the fourth quarter. Vacancy in Phoenix closed the year at 18.7%, down 20 basis points from the previous quarter and down from 19.1% at year-end 2014, says Cushman & Wakefield.
Curtis Hornaday, research analyst at Cushman & Wakefield in Phoenix, tells GlobeSt.com: "Metro Phoenix experienced impressive office absorption during Q4 of 2015, surpassing all previous post-recession quarters. We should maintain this strong level of absorption during 2016 as State Farm phases its move into four additional build-to-suit facilities and other well pre-leased properties are completed."
The Tempe North submarket led the metro area in fourth quarter absorption with more than 616,000 square feet of net absorption, accounting for 41% of the Metro Phoenix absorption. State Farm took possession of its first of five regional headquarters buildings, which accounted for 375,000 square feet of that absorption. The third building of the Hayden Ferry Lakeside Business Park was completed in fourth quarter, adding 200,000 square feet to the absorption because of strong preleasing.
Class-A and B space garnered positive growth during the quarter but class-C space posted its first net loss since first quarter 2015. Class-A space accounted for 73% of the total net gain of absorption in the fourth quarter. Tenant demand for high-quality class-A space has led the class-A vacancy to drop to 15.3%.
Construction of new office space in 2015 reached its strongest level since 2008. More than 3 million square feet of new space was added to the inventory, 63.2% of which was preleased. Nine new projects totaling almost 1.5 million square feet were delivered in fourth quarter, 72% of which was preleased. Two significant new projects were started during the fourth quarter, both being redevelopment efforts. The projects are located in the Sky Harbor Airport area and Downtown Phoenix. Within the "warehouse district" of downtown, a 122,000-square-foot former warehouse building is being converted into creative office space with collaborative, open space design. Scheduled for completion in the fourth quarter of 2016, the property will be occupied by tech companies, Galvanize and WebPT.
"Our market builds strength with each passing quarter," says Hornaday. "Metro Phoenix added nearly 50,000 jobs last year and our unemployment rate dropped to 5%. Approximately 12,600 of those jobs were in the office sector. The improving health of our economy with growing companies and businesses relocating to the Valley has driven demand for our office market."
While Metro Phoenix still posts vacancy in the high teens, asking rental rates have continued to rise. The current asking rental rate is $23.09 per square foot on an annual full service basis. This is an increase of 6.8% during the past year. The Camelback Corridor ($29.78 per square foot) and Scottsdale South ($28.09 per square foot) top all other submarkets in price and those submarkets' class-A space commands the highest rates at $33.28 per square foot and $29.74 per square foot, respectively.
"Preleasing of new projects and strong build-to-suit activity has spurred a very strong recovery for the office market," said Hornaday. "Despite adding over 3 million square feet to our local inventory, we are happy to see our vacancy rate continue to decrease. During early 2016, we expect to experience more rental rate increases of class-A and B space. We anticipate further movement towards an overall vacancy in the mid-teens as the year unfolds."
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Lisa Brown
Lisa Brown is an editor for the south and west regions of GlobeSt.com. She has 25-plus years of real estate experience, with a regional PR role at Grubb & Ellis and a national communications position at MMI. Brown also spent 10 years as executive director at NAIOP San Francisco Bay Area chapter, where she led the organization to achieving its first national award honors and recognition on Capitol Hill. She has written extensively on commercial real estate topics and edited numerous pieces on the subject.
