PHOENIX, ARIZONA – Cushman & Wakefield is reporting the Metro Phoenix job market continued to improve, adding 53,000 jobs year-over-year through the first quarter of 2018. During the same time period, the unemployment rate decreased 30-basis-points (bps), dropping to 4.1%. According to the Bureau of Labor Statistics, the Phoenix metropolitan statistical area added 12,800 office sector jobs in the last four quarters. The three sectors that make up office employment are: business & professional services, information/technology and financial activities.

In the first quarter of 2018, vacancy in the Metro Phoenix office market was 16.8%. This marks the lowest vacancy rate since the second quarter of 2008 when it stood at 16.6%. The rate dropped 60 bps quarter-over-quarter and 80 bps from the first quarter of 2017.

The Metro Phoenix office market continued to experience positive occupancy growth and absorbed more than 849,000 square feet (sf) during the first quarter of 2018. This marked the largest net gain for a first quarter since 2006. Twelve out of Metro Phoenix‘s 22 office submarkets experienced occupancy gains in the first quarter of 2018. The Tempe North submarket led the way with 549,000 sf of net absorption, due in large part to Centene Corporation occupying 310,000 sf between two office locations and MUFG Union Bank occupying 173,000 sf at The Grand at Papago Park Center. Centene Corporation also vacated 75,000 sf in the same submarket (Tempe North) in the first quarter of 2018. The Deer Valley and Downtown submarkets experienced notable occupancy growth of 151,000 sf and 138,000 sf, respectively. Ten of the 22 submarkets in the Metro Phoenix office market experienced negative absorption during the first quarter of 2018, led by the Metrocenter submarket with -132,000 sf, attributed to United Healthcare vacating 108,000 sf at Concorde Commerce Center. Across the market, Class A and B office buildings recorded over 120,000 and 776,000 of positive absorption, respectively. Class C buildings reported a loss in absorption, with -48,000 sf.

Construction in the Metro Phoenix office market remains robust in the first quarter of 2018, with 2.6 msf of projects currently under construction. The Grand at Papago Center – Phase II is the largest project to break ground in the first quarter of 2018, at 352,000 sf. Southeast Valley submarkets continued to dominate Class A projects in construction square footage and Tempe North had 936,000 sf under construction, or 47% of the total Class A projects under construction across Metro Phoenix. Chandler/Gilbert/202 currently has 343,000 sf and Price Corridor accounts for 267,000 sf under construction, accounting for 30.1% of the total Class A projects under construction. The three submarkets combined account for 1.5 msf under construction, or 76.3% of the total Class A projects under construction.

Cushman & Wakefield is currently tracking 16 projects under construction, 13 spec builds and three build-to-suits (bts). We are projecting nine of the 16 buildings under construction to deliver by the end of 2018, with over 1 msf of new inventory. Nine of the 11 Class A projects under construction are spec buildings. Tempe North accounts for two spec projects, which makes up 7.5% of Tempe North’s total new inventory. The Chandler/Gilbert/202 submarket accounts for four Class A spec projects and Price Corridor accounts for two under construction, or 12.9% and 5.8% of their total new inventory. Due to the rising costs of labor and materials, tenant improvements (TI’s) are expected to continue to rise in the foreseeable future.

During the first quarter of 2018, three projects delivered. Adding 321,000 sf of new inventory, 98.0% was preleased. 235,000 sf was Centene Corporation’s bts, located at Liberty Center at Rio Salado. Rivulon delivered the first of two spec projects, each 60,000 sf, the second spec project is expected to deliver in the second quarter of 2018. Downtown had one spec project delivered, a 26,000 sf redevelopment of an existing building in the warehouse district, a growing trend developing in Metro Phoenix.

The overall rent in the Metro Phoenix office market increased in the first quarter of 2018, to $25.31 per square foot (psf) on an annual full-service basis. This marks a 0.8% ($0.21 psf) increase from the fourth quarter of 2017 and a 2.2% ($0.56 psf) increase from the first quarter of 2017. The Midtown submarket led all others with an 18.4% increase in overall asking rents, followed by Scottsdale Central at 2.8% and Superstition Corridor at 1.8%. Scottsdale South and Camelback Corridor continue to lead the market in highest rental rates. Glendale/Peoria and West Phoenix remain the smallest and least expensive office submarkets.

The full market report is here: 1Q2018 Office Report_CW

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