Market Expected to Remain Strong After Coronavirus Leasing Pause
Phoenix, Arizona – The Greater Phoenix office market posted a healthy first quarter, being the 32nd consecutive quarter with positive net absorption. More than 100,000 square feet of positive net absorption took place in the first three months of 2020 and the vacancy rate remained below 13 percent. Leasing has declined during the coronavirus crisis, but experts anticipate a rapid improvement after economy is reopened.
The Greater Phoenix office market delivered nearly one million square feet of new space during first quarter, 80 percent of which is Class A product. This new inventory was delivered with approximately 64 percent already leased. Leasing activity was very healthy during first quarter with the number of deals involving 10,000+ square feet increasing 25 percent during the quarter. Amazon completed negotiations for 93,000 square feet at 100 Mill in Tempe. Zip Recuiter finalized its deal to occupy the entire 89,889-square-foot Allred building near Sky Harbor Airport. Additionally, Aetna expanded its footprint in Chandler, leasing the remaining vacancy space at Park Place Central 3.
Vacancy increased 10 bps during the first three months of this year, finishing the quarter at 12.8 percent. Vacancy has been trending lower since mid-2017, which is largely an indicator of job growth in the metro area. This marks the seventh consecutive quarter with vacancy below 15 percent. During the quarter, improvements in vacancy were recorded in all property classes. New space delivery has not adversely impacted the vacancy rate. For example, Tempe delivered more than 450,000 square feet of Class A space and maintained a vacancy rate of just 4.9 percent. The Southwest Phoenix submarket, which is primarily occupied by government agencies, posted the lowest vacancy at 5.5 percent. The Airport Area is benefitting from Tempe’s spill-over effect, decreasing its vacancy to 4.8 percent in the past 12 months to 14.9 percent. American Express is relocating out of the Deer Valley submarket, which resulted in a 2.9 percent increase in vacancy within that submarket.
Low vacancy continues its pressure to increase rental rates. At the end of first quarter, the average asking rental rate was $25.48 per square foot, which is a six percent increase from a year ago. Asking rents are expected to rise in the remainder of 2020 as new construction is delivered and will drive up average rates.
Strong demand for office space encouraged more construction. Approximately 3.3 million square feet were under construction during first quarter. Tempe, Scottsdale Airpark and Central Scottsdale lead the Valley with space under construction. Projects planned, but not yet underway, may take a pause as developers and lenders assess stability and confidence when the economy is reopened.
The sale of office properties dramatically slowed during first quarter following an impressive fourth quarter in 2019. Investment sales reached $241 million during first quarter, which is less than 20 percent of the last quarter’s volume. The median sales price decreased 2.7 percent during first quarter to $170 per square foot, with cap rates resting at 7.6 percent,
The office market will experience a slowdown as a result of the Coronavirus disruption. Tenants with near-term expiring leases may benefit the most because building owners will likely be more flexible with tenant requests while negotiating leases. Vacancy is expected to marginally increase during the year because of new supply coming online and businesses re-evaluating their space criteria. The economic impact of the COVID-19 outbreak is nearly impossible to estimate and data is emerging every day.