The Greater Phoenix Q4 office market ended 2014 on an upswing, with hiring on the rise, healthy levels of net absorption and vacancy continuing to tighten. Investment activity has accelerated in response to the strengthening conditions, and prices are pushing higher as landlords implement steady rent increases.
In summary:
>> Vacancy in the Greater Phoenix office market continued to trend lower, ending the year at 17.8%. This marks the fifth consecutive year where vacancy has improved.
>> Vacancy is tightening across all property classes, but the fastest rate of improvement is being recorded in the Class A segment. Despite the completion of approximately 400,000 square feet of Class A spec space in 2014, vacancy in Class A buildings declined 240 basis points to 16.8 percent from year-earlier levels.
>> Net absorption dipped from more than 1 million square feet in the third quarter to approximately 880,000 square feet in the fourth quarter. Despite the modest quarterly dip, net absorption has now been positive in each of the past 11 quarters. Net absorption for 2014 topped 2.9 million square feet, up from approximately 1.7 million square feet in 2013.
>> Continued absorption is helping to drive rents higher. Average asking rents ended 2014 at $21.08 per square foot, 3.3 percent higher than one year ago. Further increases are forecast for 2015.
Office Sales Activity
Office sales surged in the third quarter and rose another 10% in the fourth quarter. In all, sales of office buildings in the second half of the year spiked nearly 40% from first half. Recent transactions were generally larger than average, with deals over $20 million accounting for more than 20% of the activity in the quarter.
For the year, the number of properties sold increased 8% from 2013 levels. With median reaching $113 per square foot, up from $112 per square foot in the first nine months of the year. Prices are being supported by an ongoing recovery in property fundamentals, particularly with rents on the rise, in addition to interest rates remaining low.
For the year, cap rates averaged in the low-to mid-7 percent range.
The Greater Phoenix office market is in a steady recovery cycle, setting the stage for further strengthening in 2015. Employment growth in the Phoenix metro area has been modest to this point in the cycle, and gains have been concentrated in office-using sectors of the economy such as professional and business services and finance. Looking ahead to 2015, gains in these white-collar segments should continue, but growth should extend more broadly across the economy and total employment expansion should top the rate achieved in recent years. This more widespread economic strengthening will prove beneficial to the office market as a whole, and net absorption should accelerate to 3.2 million square feet in 2015. With absorption on the rise and vacancy tightening, rent growth is forecast to accelerate.
See the full report here: Phoenix Office Report 4Q 2014