Is Phoenix Spec Office Construction Overheating?

The office construction pipeline in Phoenix is robust with more than 2.5 million square feet currently under construction. While Phoenix has a history of overbuilding—as it did in the last recession—the office construction pipeline in Phoenix is in check. In fact, a recent report from Colliers International shows that the pipeline shrunk from 2016 to 2018, and signifier that there is no cause for overbuilding.

“I think it is best to look at office space supply from a more macro prospective.  In terms of net square footage delivered, the decade ending 2010 brought the highest amount with approximately 47 million square feet of new office space.” Thomas Brophy, research director at Colliers International in Arizona, tells GlobeSt.com. “The 1980s expanded our office inventory with 44 million square feet delivered, followed by the 90s with 26 million square feet.”

Phoenix has developed a steady track record of development this cycle. “Since 2011 metro Phoenix developers have delivered a little more than 14 million square feet—an average of 1.5 million square feet delivered per year since 2011), which is 64% LOWER than 2000 to 2010′s per year average of 4.2 million square feet,” says Brophy. “Additionally, much of the development since 2011 has been focused on build-to-suits and/or significant pre-leasing prior to start of speculative development. These two factors have kept overdevelopment in check.  While it is surprising to say.”

However, Brophy does have some concern that certain spaces are less desirable.

“I tend to worry more about under development in consideration of tenant space needs.  More than 70 million square feet of our office inventory was built before the turn of the century (1980-1999). Many of the office floorplans are now functionally obsolete,” he says. “Floorplans can be too small or are unable to be reconfigured to open up large spaces for the space plans desired by today’s tenants How investors reposition properties to accommodate the needs of future office users will be an interesting dynamic to watch over the next several years in Metro Phoenix.”

Along with the healthy construction pipeline, Phoenix office vacancy rate has inched up. “The increase in vacancy we are projecting for Metro Phoenix will be experienced by specific pockets/submarkets and generally limited to those areas. Submarkets with an abundance of older buildings will be particularly susceptible to this rise in vacancy,” says Brophy. “Overall, Greater Phoenix has been averaging just over 4% rent growth year-over-year since 2013.  While that has been impressive, I don’t necessarily think that will last over the long term.   Delivery of new product will keep the upward pressure on rental rates in the near to mid-term.”