Metro Phoenix Posts Strongest Q1 Office Absorption in 10 Years

Metro Phoenix

(NEWS RELEASE) Cushman & Wakefield announced today that the Metro Phoenix office market posted its strongest first quarter of absorption since Q1 2006, with over 730,000 square feet (sf) during Q1 2016.

At the close of Q1 2016, office vacancy stood at 18.2%. This marks a considerable reduction from the 18.7% rate in place three months ago, and an even more significant drop from the 19.4% reading one year ago.

“With employment reaching 1,964,800 total nonfarm jobs, the Valley has recovered all jobs lost during the Great Recession,” says Curtis Hornaday, Research Analyst with Cushman & Wakefield.  “Metro Phoenix continues to improve with 67,000 jobs added, year-over-year through February, and our unemployment rate dropped to 4.6%. Approximately 26,900 of those jobs were in the office sector, with the business and professional services category accounting for 40% and is the leading indicator for office space demand.”

The Mesa submarket led the metro area in Q1 absorption with more than 160,000 sf of net absorption. This was due in large part to Santander Bank occupying the newly redeveloped Centrica project, which also dropped the overall submarket vacancy by 66% to 76%.  The Sky Harbor submarket followed with 78,000 sf and the Scottsdale Airpark submarket with 71,000 sf of gains.

All building classes posted net gains during the first quarter of 2016. In contrast to 2015, where the majority of net absorption occurring in new Class A projects, including the numerous build-to-suit projects, Q1 2016 saw all of the occupancy growth occurring in existing buildings with an average-year-built of 1990.

Five new projects were delivered in the Chandler/Gilbert/202 submarket, during the first quarter for 2016, adding 291,000 square feet of inventory, which now sits completely vacant. New speculative office construction remains muted as a result of capital constraints from institutional investors, which bodes well for existing Class A and B office projects that are positioned for increased occupancy and rental rate growth.

“New tenant activity has accelerated since the beginning of the year with numerous large sized requirements in excess of 75,000 sf looking for space in the market,” said Mike Beall, Executive Managing Director with Cushman & Wakefield. “Due to the lack of large contiguous blocks of space available in Class A buildings, many users are considering redeveloped and repurposed Class B projects that have large floor plates, high volume ceilings, and generous parking ratios. In addition, Class A office tenants are highly focused on the building amenity value proposition because of their need to attract and retain top employment talent.”

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 (psf) on an annual full service basis. This is an increase of 7.4% over the past year.  The North Phoenix/Desert Ridge ($24.74 psf) and Scottsdale South ($29.26 psf) submarkets recorded the largest quarterly gains in the Valley, increasing 8.4% and 4.2%, respectively. The Camelback Corridor ($30.29 psf) and Scottsdale South ($29.26 psf) remain atop all other submarkets in terms of average asking rates, and it is no coincidence that the Class A rates in these trade areas are among the Valley’s highest, at $33.55 psf and $30.24 psf respectively.

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