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Only One Western Market Bests Phoenix Occupancy Growth

PHOENIX—With more than 1.7 million square feet of occupancy growth during the first half of 2016, the Phoenix office market ranks fourth out of 87 markets and only Dallas outperformed Phoenix for occupancy growth in the west.

By Lisa Brown | lisabrown | | Updated on July 28, 2016
Phoenix industrial Hornaday says Phoenix is posed for occupancy gains and average asking rates.
PHOENIX—The Metro Phoenix office market posted the largest midyear net gain since 2006, with slightly more than 1 million square feet during the second quarter 2016, according to Cushman & Wakefield . At the 2016 midyear point, office vacancy in the Metro Phoenix office market stood at 18%, a 20 basis-point reduction from first quarter 2016, and an even more significant drop of 130 basis points from the 19.3% reading of second quarter 2015. “The Metro Phoenix job market continued to show signs of improvement, adding just over 62,000 jobs year-over-year through May 2016,” says Curtis Hornaday , associate market director of research with Cushman & Wakefield.  “Out of the 62,000 jobs added, nearly 40% were office sector jobs. Over the past five years, the Phoenix office sector has outperformed state and national averages by virtue of favorable demographics and being viewed as a much cheaper technology hub when compared to California.” The Tempe North submarket dominated all other submarkets during the second quarter with more than 572,000 square feet of net absorption, which accounts for 57% of all occupancy growth for the entire market in the second quarter. Tempe North’s net gain is due to State Farm taking down the second building (620,000 square feet) of its five-building regional headquarters, all of which are build-to-suit properties. The Price Corridor submarket followed with more than 254,000 square feet of growth, which can be attributed to Infusionsoft occupying the fourth building (100,000 square feet) in Allred’s Park Place Central development and ViaSat moving into its 72,000-square-foot build-to-suit space. Tenant demand remained overwhelmingly high for class-A space during the second quarter posting a net gain of more than 638,000 square feet. In regard to year-to-date performances, class-B space accounts for more than 47.6% of the total absorption in Metro Phoenix, with class A and class C following at 46% and 6.4%, respectively, says Cushman & Wakefield. “In total, we are projecting over 2.9 MSF of new inventory to be delivered during 2016, 55% of which is preleased,” said Jerry Noble , senior director with Cushman & Wakefield. “By year end, we could see net absorption exceed 3 MSF as job growth remains positive.” In the second quarter of 2016, four new projects broke ground totaling more than 733,000 square feet, all of which are speculative buildings. Cushman & Wakefield is currently tracking nearly 2.5 million square feet under construction in the Metro Phoenix office market, of which 1.6 million square feet is scheduled to be completed by the end of 2016. “Continued demand for premium product will drive up the region’s overall average asking rents,” added Hornaday. “Asking rents are up 6.4% year-over-year and over 19.2% from the post-recession low point reached in Q1 2013.” The average asking rent in the Metro Phoenix continues its upward trend, with a current direct rate of $23.63 per square foot on an annual full-service basis. This marks a 0.6% (or $0.15 per square foot) increase quarter-over-quarter and a staggering 6.4% ($1.42 per square foot) increase year-over-year. The Mesa ($14.73 per square foot) and Scottsdale South ($30.39 per square foot) submarkets recorded the largest quarterly gains in Metro Phoenix, increasing 4.1% and 3.8%, respectively. In regards to the average asking rates for class-A space, the Camelback Corridor ($34.80 per square foot) and Scottsdale South ($31.72 per square foot) submarkets remain the high-water marks. Despite having the highest rates in Metro Phoenix, Cushman & Wakefield tracked more than 84,000 square feet of combined leasing activity for class-A space in these two submarkets during the second quarter of 2016. Hornaday tells GlobeSt.com: “With the Metro Phoenix housing market inching closer to historical levels in terms of new construction, home sales and pricing, one of the benefactors is the Phoenix commercial real estate market which is posed to experience large gains in occupancy and average asking rates throughout all sectors. With over 1.7 million square feet of occupancy growth during the first half of 2016, the Phoenix office market ranks fourth out of the 87 markets Cushman & Wakefield tracks. Of the three markets that out preformed Phoenix in terms of occupancy growth, the only market located in the western region is Dallas/Fort Worth.”  

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