The Phoenix office market continues to slowly improve. Too slow for my taste, but improvement is always good. Unless you are in Tempe, Chandler or Scottsdale, the market is not improving as fast as owners and investors would like. Lee & Associates Arizona released its second quarter Office Market Update in July and showed that success these days is clearly dependent upon the submarket. The disappointing news is that we only had 143,000 SF of net absorption across the Valley. This comes as a surprise after such a strong first quarter with 730,000 SF of space absorbed. As a result, our overall vacancy dropped only slightly from 22.2% to 21.8%; and rental rates in many submarkets remained flat. However, the market remains on the path to recovery highlighted by some bright spots along the way.
Here are my top three takeaways for the quarter and a link below to our second quarter report:
- Slow Office Absorption is caused by lack of job creation, there is no getting around that. It’s also due to companies becoming more efficient with their space. Technology groups in particular now design densities of 7-8 per 1,000 SF leased whereas that figure was 4-5 per 1,000 in the last cycle. Despite this, absorption is happening and will continue to increase as the economy improves.
- Confidence Is Increasing for both landlords and tenants. There has been enough absorption in the last few years to give landlords a sense of stability. This confidence translates into the high prices and low cap rates that landlords will pay for quality real estate. For newer buildings with walkable amenities, tenants feel good enough about their business to pay increased lease rates.
- Market Health Varies by Submarket. Craig and I negotiated 2 of the top 5 leases in the 2nd quarter. One was in Scottsdale while the other was a renewal and expansion in the SE Valley. Lease rates in both markets have increased substantially since the recession with vacancies falling into the low teens. SkySong 3 in South Scottsdale, a speculative project we lease, has reached 90% occupancy just weeks prior to its opening. On the flip side, Midtown remains weak at 26.8% vacant with owners competitively bidding for precious tenants.
As the third quarter begins, my team is already negotiating some substantial sales and lease transactions. I hope these deals will be a reflection of success the entire market will experience in the second half of the year. If you have any specific questions on the market or your lease, please call me.
P.S. Click here to see an article on national leasing trends in which I was featured in the current issue of CCIM Institute Magazine.
For the entire report, click here.