Tightened Class-A Office Vacancy Drives Class-B Activity

Cox says Midtown is an opportunity for tenants priced out of neighboring submarkets.

PHOENIX—Due to the improving economic environment, tenants are finding an increasingly supply-constrained office market in the Greater Phoenix area as there are fewer ideal options from which to select. This has some tenants gravitating towards class-B product, says JLL in its second quarter Phoenix office report. During the second quarter, class-A office space accounted for only 37% of the total net absorption in Metro Phoenix, down from 69% at the end of 2015. Meanwhile, class-B total net absorption nearly doubled during the same time period, increasing from 32% to 61%. And, as has occurred in past cycles, increased activity in Midtown is expected as rents in other major class-A office corridors rise. Kiana Cox , senior research analyst with JLL tells GlobeSt.com: “Midtown presents an opportunity for tenants who have been priced out of neighboring submarkets. As a more diverse tenant base moves toward Midtown to take advantage of lower rates, ample amenities and access to public transit, vacancy in Midtown will decrease in the same way it has in previous cycles. We’ve been studying Midtown’s previous market cycles in order to predict how rental rates will move during this rising market phase, and the Midtown submarket is due for its inevitable post-recessionary bump in rental rates.” For example, in 2003, average asking rents in Camelback Corridor were nearly 28% higher than Midtown. As asking rents continued to rise in the subsequent years, tenant demand shifted toward office space in Midtown. In the second quarter of 2016, class-A asking rents reached $33.48 and $24.03 in Camelback Corridor and Midtown, respectively. With this wide price delta, there should be more price-conscious tenants looking at the Midtown submarket. “The Midtown submarket is an affordable alternative to Camelback Corridor’s class-A space but it also provides value because tenants still have access to ample amenities,” says JLL vice president Vicki Robinson . “Midtown is a great location for tenants who need convenient access to the Valley’s major freeway systems. It is minutes away from Sky Harbor International Airport and offers easy access to the businesses and amenities of downtown Phoenix and Camelback Corridor. Many of my clients appreciate Midtown because it offers quick access to all of the governmental services found at the Capitol Mall and to the court system located in downtown Phoenix.”