The money is out there for Class A office space in the Valley

Esplanade
PromenadeCorpCenter
The Promenade Corporate Center in Scottsdale was one the many Class A office spaces sold in the Valley in the last month.

By Philip Haldiman, Editor-in-Chief | Dealmaker

The Valley has seen a batch of high-priced office buildings change hands recently, giving way to a fresh demand for Class A properties, experts say.

In the last month, nearly $400 million has been spent for office spaces with Class A tenants in Class A locations throughout the Valley.

Mark Stapp, director of ASU’s Master of Real Estate Development program, told Dealmaker some of this has to do with the lack of activity in recent years.

“We have had very little new commercial development for long time and demand has finally put pressure on supply,” he said.

Last month, Phoenix saw its biggest transaction in a number of years with the sale of the University of Phoenix headquarters near the southwest corner of Interstate 10 and 32nd Street for $183 million.

Other recent high-ticket office deals include:

  • $74 million sale of the 218,266-square-foot, 10-story Camelback Esplanade III office building near the southeast corner of 24th Street and Camelback Road in Phoenix.
  • $65 million sale of the 256,175-square-foot, 4-story Promenade Corporate Center near the southeast corner of Scottsdale and Bell roads, in Scottsdale.
  • $18 million sale of the 364,352 square-foot, 12-story Security Title Plaza high-rise at the southwest corner of Weldon and Central avenues in central Phoenix.

Craig Coppola, commercial real estate broker with Lee & Associates Arizona, told Dealmaker Class A office properties are in demand.

These properties are usually at prestigious locations with premier tenants, and as a result, command high sale prices, he said.

Promenade Corporate Center is occupied by tenants including Fitch, Inc., Healthcare Trust of America, Meridian Bank and Regus Corporation. Tenants at Esplanade III range from CBRE to Major League Baseball’s western headquarters.

Coppola recently negotiated the $41 million sale of the 279,503 square-foot, 3-office-building Papago Arroyo at 12th and Washington streets, in Phoenix.

“There’re tons of money for Class A properties right now, lots of people with money spending on those types of properties,” Coppola said. “It has been a real bifurcated market and it’s based on the (class of buildings).”

Building classification is subjective and based on letter classification, with Class A being the most prestigious. But Coppola said the market usually determines the category, with Class A properties having a number of things going for them.

“Stability of investment is one,” he said. “They also tend to stand the test of time. For example, the Esplanade has been around for a number of years with a tenant roster that has been Class A and a location that is Class A.”

Office properties considered Class B or C are harder sells.

Stapp said a lot of supply has become physically, functionally or socially obsolete. This could be because of parking, technology, location, configuration or a combination of all those elements, he said.

“Because of this, new contemporary space is in demand,” he said. “Vacant space may not be competitive, so the demand is looking for space that meets its needs.”

Phoenix has one of the highest overall office vacancy rates in the country at 21.9 percent, according to Cushman & Wakefied.

But Coppola said how a building’s vacancy plays into a purchase depends on the profile of the buyer.

Promenade Corporate Center is currently 80 percent occupied. Buyer Lincoln Property Company, said in a statement that the purchase is an opportunity to fill out the remaining office space and maximize its potential as the area’s largest and best office option.

Coppola said some buyers like an empty building because they may want to add value with new renters.

“Still, to have a vacancy rate that high is scary,” Coppola said. “You can’t hide from the vacancy rate.”

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