Demand in 2018 Outpaced New Construction While Economy Brought Job Growth

Phoenix, Arizona – Greater Phoenix had a banner 2018 in the office market sector, according to a report released by Colliers International in Arizona.  A strong economy brought nearly 80,000 new jobs, which spurred demand for office space that outpaced new construction.

The estimated 79,700 net new jobs mark a 3.9 percent increase over 2017, making 2018 the strongest job growth for the metro in more than a decade.  More than 24,000 of these jobs were white-collar positions that fuel demand for office space. The growth has positioned Greater Phoenix in fourth position of the top 36 major employment markets in the country, up from fifth in 2017.

Net absorption of office space increased 106 percent in 2018, totaling an impressive 3.53 million square feet.  Fourth quarter brought a decline in net absorption that appears to have stemmed from limited supply of large spaces in desirable submarkets.  Completion of new projects during 2019 should alleviate this problem.

Despite the fourth quarter dip in net absorption, move-ins far outpaced new construction.  This brought vacancy of office space down to 13.9 percent, 200 basis points below year-end 2017.  Declines in vacancy were experienced in all classes of office space.  Tempe ended the year with the lowest vacancy rate at six percent, followed by Deer Valley Airport with 10.7 percent.  The top five strongest submarkets in terms of vacancy include 44th Street Corridor, Scottsdale Central and Scottsdale South.  Vacancy is expected to edge higher in 2019 as speculative development projects come online, adding new inventory to the market.  Colliers International forecasts the office market will finish 2019 with approximately 14.5 percent vacancy.

The largest leases signed during 2018 were for buildings in the Airport Area, Tempe, Chandler and Northwest Phoenix.  One of the most notable was WeWork’s lease for 54,000-square- feet at Camelback Esplanade, 2425 E. Camelback Rd.

The decline in vacancy has pressured rental rates upward, though at a more modest pace than in previous years.  Asking rents at the end of 2018 averaged $24.81 per-square-foot, which is a 2.6 percent increase from year-end 2017.  Rate increases have moderated in the Class A sector, while Class B and C rent escalations have been stronger. Asking rental rates are expected to continue rising in 2019, though at very moderate levels.

Deliveries of new buildings were modest during fourth quarter with approximately 355,000 square feet coming online.  During 2018 the market added slightly more than 1.2 million- square-feet of new office space.  Recent deliveries have been minimal, but the pipeline of new projects is filling.  Currently, an estimated 3.4 million-square-feet are under construction, compared to a year ago when we had just 1.7 million-square-feet underway.

Investment sales volume declined a minimal five percent year-over-year during 2018.  A total of $2.47 billion of office space traded hands last year.  While the total value of assets sold dropped, the number of transactions completed was higher during 2018.  Transaction numbers rose 25 percent to 184 during 2018.  The median price per square foot rose 17 percent to $176 per-square-foot with cap rates averaging 6.9 percent. Interest rate increases have not significantly impacted cap rates.

The Greater Phoenix office market is expected to remain strong throughout 2019.  During last year, approximately a dozen companies announced plans to add workers in the marketplace.  IT consulting company Infosys plans to more than double its Arizona workforce, adding 1,000 white-collar jobs during the next five years.  Other companies with big announcements included Nationwide Insurance’s North Scottsdale regional campus and Deloitte’s new Gilbert operations center, all of which will bring thousands of new jobs over the next few years.

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