Office sales and leasing activity picks up to close 2017

The Greater Phoenix office market rebounded a bit during the fourth quarter following modest activity levels in the preceding three months.

For the full year, net absorption totaled more than 1.7 million square feet, representing more than 1 percent of total inventory, but down from 2014-2016 levels, when the market averaged net absorption of more than 3 million square feet per year. While the absorption totals in 2017 lagged figures from recent years, there was sufficient tenant activity to drive the vacancy rate lower for the seventh straight year.

Key Takeaways:

  • Conditions in the Greater Phoenix office market bounced back during the fourth quarter after a slowdown in the third quarter.
  • Vacancy crept lower and net absorption gained momentum.
  • Vacancy fell by 20 basis points during the fourth quarter, ending 2017 at 16.1 percent. The rate inched down 10 basis points from one year earlier. This marked the seventh consecutive year where office vacancy has improved in Greater Phoenix.
  • The average asking rent rose 3.3 percent in 2017, closing the fourth quarter at $24.40 per square foot. This marked a deceleration in the pace of rent growth; asking rents advanced by more than 5 percent per year in both 2015 and 2016.
  • Sales activity picked up to close the year, highlighted by a record-setting sale of the State Farm regional headquarters at Marina Heights. The median price rose and cap rates compressed during the fourth quarter.

The Greater Phoenix office market is forecast to have another year of improvement in 2018. Tenant demand will likely remain healthy as businesses continue to expand. After a slowdown in 2017, the pace of expansion could receive a boost as the economy has gained momentum, consumer confidence is elevated and corporate tax rates have been cut. These measures should support a favorable business climate in the year ahead.

One of the significant shifts occurring in the Greater Phoenix office market is the move from build-to-suit construction to spec development. In recent years, construction has been dominated by build-to-suit developments for State Farm, McKesson and others.

Looking forward, approximately 70 percent of the square footage currently under construction is spec development. Many of these projects are slated to come online in the second half of 2018, allowing time for these buildings to be leased ahead of delivery.

The outlook for the investment market remains healthy, due in large part to strengthening property performance which has buoyed investor sentiment. In 2017, fewer office buildings sold but transaction sizes were larger.

Buildings of over 100,000 square feet accounted for nearly 20 percent of transactions in 2017, up a few percentage points from 2016. In addition, nearly 30 percent of all office sales topped $10 million in 2017. These trends suggest that larger transactions will likely play a more prominent role in the local office investment market in the year ahead.