1-Minute Phoenix Metro Office Update: Q3 2018

Below is my quarterly take on the Metro Phoenix office market. Readers of this narrative know that I am an office broker who works every day representing Tenants and Landlords as they navigate real estate nuances and opportunities.  I (along with my incredible team) am based in Phoenix but work around the country and internationally as well. We are hired for all kinds of reasons including our in-depth, up-to-the-minute market knowledge.

Here is some…

Wow! The Metro Phoenix Office Market absorbed nearly one million square feet (SF) of space in just the third quarter; and saw vacancy drop to 17.25%. Net absorption, the key indicator of a market’s health, represents job growth.  Vacancy has not dipped this low since 2007 and should continue to hover around this figure as new buildings come online to capture tenant demand.  With a strong Q3, net absorption now stands at 2.7 million SF YTD — 2017’s figure for the entire year reached 1.8 million SF.

The bottom line is that we finally hit strong net absorption for Metro Phoenix.  This shows we still have sustained growth left in their cycle. 

Through negotiating leases and sales each week, I’m noticing two significant trends:  1) Companies continue to relocate significant business units to Greater Phoenix, and 2) they choose to expand existing operations here versus other markets across the country.  And it’s not just because of affordable real estate.  Quality of life, right to work state, and the nations’ most innovative university, Arizona State University, are just a few of the many reasons more jobs are ending up here.

1. Tenants want more Tempe space – At 8.6%, the Tempe submarket holds the lowest vacancy and developers with sites are responding to the lack of supply.  Around 822,000 SF is under construction with several other projects trying to enter the pipeline soon. 

2. While the tide is rising around Tempe, next door, the Sky Harbor/Airport submarket posted almost 600,000 SF of net absorption in Q3.  South and Central Scottsdale continue to enjoy some of the healthiest occupancy rates in town.  All of these submarkets are adjacent neighbors that provide quality alternatives to the Tempe buzz.

3. Class B buildings leased over seven times the amount of class A buildings in Q3.  As class A rents continue to escalate along with the cost to build them out, we may see even more businesses select class B buildings to keep their occupancy costs in check.   Class A leasing has significantly outpaced class B progress over the past few years.

Want to talk more about these trends or what we can expect from 2019?  Give me a call.