First Quarter Sublease Deals Hit Highest Volume Since Pandemic Began
PHOENIX, ARIZONA – The Greater Phoenix office market posted a rise in average rental rates during first quarter, despite the market’s negative net absorption, according to a report released by Colliers in Arizona. The first three months brought the highest number of sublease deals completed since the pandemic began, signaling the return of the area’s office market.
Despite strong leasing activity during first quarter, net absorption of office space fell into the negative region, totaling -143,579 square feet. This cross to negative territory was largely attributed to sizable move-outs that took place in the first three months of the year. Four buildings faced move-outs greater than 70,000 square feet. These included Zelle vacating 127,000 square feet at McDowell Mountain Business Park in the Scottsdale Airpark area. First quarter 2022 brought more than 500,000 square feet of new sublease space. The volume of sublease transactions completed during first quarter tripled year-over-year with the average sublease being 14,650 square feet. Online car company Carvana expanded its large presence in the valley by signing the two largest deals of the quarter. These included a sublease transaction for 267,962 square feet and a direct lease for 82,257 square feet in Tempe.
The direct vacancy rate increased 10 basis points quarter-over-quarter to 14.1 percent, but remained flat compared to a year ago. Vacancy in Class A properties increased by 60 basis points over-the-quarter and 240 basis points year-over-year to 17.4 percent. Vacancy in Class B assets decreased by 20 basis points over-the-quarter and 70 basis points year-over-year to 13.4 percent.
Rental rates rose slightly during first quarter, with increases totaling 2.5 percent year-over-year to an average rate of $28.12 per square foot. Rental rates for Class A space remained relatively level. However, Class B assets are witnessing greater growth, increasing 1.04 percent over-the-quarter and 3.77 percent year-over-year ending at $25.32 per square foot. Suburban submarkets are experiencing the largest rental rate increases. Arrowhead and Gateway Airport/Loop 202 submarkets ended the quarter with the largest year-over-year gains.
The first quarter brought no new construction completions to the office market, marking the first quarter in more than a decade without new product added. However, a 150,000-square-foot new speculative project was started in Tempe. Rio Yards is a Class A, multi-phase development and is the first of the next phase of speculative office projects moving forward. Currently there are 1.8 million square feet of office space under construction in Greater Phoenix. More than 51 percent of the space is already committed to users. Tempe has the largest amount of construction underway with 620,526 squre feet. That area is followed by West I-10 with 377,628 square feet under construction. Two large projects will be completed soon. 100 Mill in Tempe will be delivered in early second quarter and The Grove at 44th Street an Camelback is expected to be completed near the end of third quarter and are both over 80 percent pre-leased.
Investment sales of office properties during first quarter were heavily loaded in March. The total volume of investment sales in the quarter totaled $893 million with a median price of $198 per square foot. Class A proprty sales experienced a median price increase of 11.8 percent over-the-quarter to $359 per square foot. Class A investment sales were driven by two multi-property transactions. The Esplanade Porfolio at 24th Street and Camelback Road consisted of four buildings totaling 970,194 square feet, trading for $385 million, $390 per square foot. The properties were 85 percent leased at the time of sale. The second transaction was George Oliver’s second re-development disposition in less than 12 months. The Alexander and Johnathan buildings total 210,710 square feet and were purchased for $86.5 million, $411 per square foot.
As more companies return to the office, they will be reconfiguring their office spaces. We are seeing may businesses offer flexible work schedules, including a few days work from home. Phoenix has a dynamic economy that continues to attract new companies in both expansion and relocation mode. Demand from existing and relocating companies will drive more absorption in this market, as well as speculative development that was forced to pause during the pandemic.