Greater Phoenix Office Market Impacted by JP Morgan Chase Vacating Downtown Tower

PHOENIX, ARIZONA – The Greater Phoenix office market posted sizable negative net absorption during third quarter, due in large part to JP Morgan Chase vacating 721,349 square feet at its landmark high-rise in downtown. Despite absorption problems, the market benefited from dynamic investment sales and an uptick in rental rates, according to a report released by Colliers in Arizona.

The market experienced -317,887 square feet of net absorption during third quarter, marking the second worst quarter since the beginning of the pandemic and the second lowest in five years. The negative net absorption was dramatically impacted by JP Morgan Chase’s move out of Downtown to its new, Tempe campus.

If you analyze the market without consideration of JP Morgan Chase’s relocation, the picture looks much more dynamic with more than 400,000 square feet of positive net absorption during third quarter. Direct leasing activity experienced a 30 percent increase over-the-quarter. Dansons, Inc. purchased a former Nationwide building in Central Scottsdale and Goettl Air Conditioning acquired a 55,000-square-foot building in the Airport Area. Sublease activity remained very active, particularly in the 10,000-50,000-square-foot range of tenants. During third quarter, 10 sublease transactions were completed at an average size of 30,908 square feet.

Direct vacancy in the office market increased 20 basis points quarter-over-quarter and 160 basis points year-over-year to reach 14.2 percent at the end of September. Class A property vacancy increased by 150 basis points year-over-year to reach 16.7 percent at the end of third quarter. Chase Bank’s former space in Downtown now offers the largest block of existing office space available in the entire market.

Sublease availability continued expanding during third quarter, peaking at the highest level ever witnessed in Greater Phoenix at 4.7 million square feet. During the last 45 days of the quarter, four large tenants added 526,755 square feet of new sublease space to the market. These additions were primarily focused in Scottsdale Airpark and Tempe submarkets. Despite the increases in vacancy during the pandemic, the combination of direct vacancy and sublease availability still falls far below the peak level of 21.8 percent vacancy experienced in 2011.

Rental rates gained momentum after declining during the first half of 2021. During third quarter, rates increased slightly to an average of $27.76 per square foot. Rates increased over-the-quarter by 0.65 percent, but decreased 0.04 percent over-the-year. The large amount of discounted sublease space is placing downward pressure on rates and restricting increases. As the city expands, suburban areas are experiencing the largest increases in rental rates. Arrowhead, West I-10 and Glendale all posted increases in rates both over-the-quarter and year-over-year. Downtown, both North and South, had decreasing rental rates both over-the-quarter and year-over-year.

Construction has been relatively slow with just three projects being completed in third quarter. The properties total 228,934 square feet and held a relatively high vacancy of 74.9 percent at the time of delivery. Currently 16 projects are under construction totaling 1,894,795 square feet. Approximately 28.44 percent of this space is pre-leased. Tempe submarket has the most development underway with 470,526 square feet, which is 32.5 percent pre-leased.

Investment sales rose significantly during third quarter, posting the second best quarter for total volume in the past three years. During the past three months, Greater Phoenix posted $858 million in office property sales. This is equal to 94 percent of the volume posted during the entire first half of the year. Year-to-date median price per square foot is $185. During third quarter, the market completed two transactions over $100 million. The Boyer Company sold two of the Rio2100 buildings totaling 300,000 square feet to Strategic Office Partners for $132 million. Fountainhead Office Plaza, comprised of two buildings totaling 445,957 square feet, was sold for $117.5 million.

Despite the sublease market growing, more workers are beginning to return to the office. Working in an office environment creates collaboration and drives spontaneous business interaction. Recent activity in the market from new-to-market tenants demonstrates the strength of our labor force and the appeal of our pro-business community. These factors offer a positive outlook for the office market moving forward.

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JLL Capital Markets closed the sale of Oxford Apartment Homes and arranged acquisition financing

PHOENIX, ARIZONA – JLL Capital Markets announced today that it has closed the sale of and arranged acquisition financing for Oxford Apartment Homes, a 432-unit, low-density garden-style multi-housing community in Phoenix, Arizona

JLL marketed the property on behalf of the seller, Knightvest Capital, and procured the buyer, S2 Capital Partners. Additionally, working on behalf of the new owner, JLL secured the floating-rate loan with Blackstone Mortgage Trust, Inc. (NYSE: BXMT).

Oxford Apartment Homes comprises one-, two- and three-bedroom units averaging 888 square feet. The seller implemented two separate renovation scopes to the property with 182 units being fully renovated and 74 units partially renovated. Common area renovations included upgraded clubhouse, fitness facility and pool, new package lockers, lighting enhancements and new signage.

Located at 3777 East McDowell Rd., Oxford Apartment Homes is situated just northwest of the Loop 202 and SR 143 interchange, in one of the Valley’s most central locations. The property offers residents exceptional access to the Valley’s major employment hubs and entertainment amenities including Downtown Phoenix, North Tempe/ASU, South Scottsdale, Midtown Phoenix and Camelback Corridor.

The JLL Capital Markets Investment Sales Advisory team representing the seller was led by Senior Director Mike Higgins, Managing Directors John Cunningham and Charles Steele and Analyst Matt Prokop

The JLL Capital Markets Debt Placement team representing the borrower was led by Senior Managing Director Mark Brandenburg, Managing Director Michael Cosby and Senior Director Brad Miner.

JLL Capital Markets is a full-service global provider of capital solutions for real estate investors and occupiers. The firm’s in-depth local market and global investor knowledge delivers the best-in-class solutions for clients — whether investment and sales advisory, debt advisory, equity advisory or a recapitalization. The firm has more than 3,000 Capital Markets specialists worldwide with offices in nearly 50 countries.

TUCSON, ARIZONA — Cushman & Wakefield | PICOR is reporting that in the third quarter 2021, the Tucson market recorded employment of 384,600 jobs with a positive outlook, up 4.3% over the third quarter 2020. The unemployment rate improved from 7.9% in the third quarter 2020 down to 6.5%. Median household income in Tucson remains steady year-over-year (YOY) at $57,600, in line with national figures. Population grew 0.9% YOY with a positive outlook, more than double the national gain of 0.4%. Due to pandemic-related supply chain issues, housing permits decreased 14.1% YOY in Tucson but remain up 28% year-to-date. Housing demand is stronger in recent years partly due to migration, but supply constraints limit the number of houses sold. Arizona is experiencing a very healthy recovery in retail sales, up 17.4% YOY even while factoring in a dip in July of this year.

SUPPLY & DEMAND:
The vacancy rate for Tucson held steady at 6.2% in the third quarter of 2021, with expansion in the quick-serve restaurant (QSR) format. QSR growth was primarily within corporate franchises like McDonald’s, Taco Bell, Starbucks, Chipotle, and Subway, which typically contain an 1,800 to 2,800 square feet (sf) footprint optimized for takeout and delivery. Locally operated independent restaurant growth was primarily driven by second-generation space from restaurants that did not survive the pandemic.

The largest sale transaction in the third quarter was the 278,719 sf La Encantada retail center at Skyline Drive & Campbell Avenue, purchased by local investors. High construction demand this quarter was hampered by significant cost increases and understaffing, with extreme prices as the sticking point preventing some deals from moving forward. Discount stores like Dollar General and Dollar Tree performed well. Grocery and other retailers increased focus on delivery and mobile order pickup as the new growth area. Shopping centers continued to embrace adaptive reuse with fitness centers, medical care, and dental care offices.

PRICING:
Lease rates in Tucson remained steady at $15.48 per square foot. Retail investors began speculating on commercial property in a similar manner to the 1970s as the market appears to be heading into an inflationary cycle. Internet-proof properties that include Grocery stores, restaurants, medical services and/or salon type service businesses are especially attractive. With interest rates remaining low and prices increasing, those who purchase fixed assets at fixed interest rates will likely see rent increases in the future.

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