2018: The year that was

Key Takeaways:

  • Greater Phoenix had a banner 2018. During the 12-month period ending in December, preliminary estimates show that employers added 79,700 net new jobs, an increase of 3.9 percent, which marks the fastest growth in over a decade. This places Phoenix 4th among the top-36 major employment markets in the country for new job growth, up from 5th in 2017.
  • Overall the Greater Phoenix office market had a strong 2018, although net absorption declined in fourth quarter from more robust levels recorded earlier in the year, over the year absorption hit 3.53 million square feet, an increase of 106 percent from 2017. Employers continue to add workers at a very active pace, fueling tenant demand for office space and fueling new development.
  • While net absorption moderated in the fourth quarter, tenant move-ins still far outpaced new construction, which drove vacancy down to 13.9 percent, 200 basis points lower than one year ago. Continued vacancy declines are supporting rent growth, although gains in 2018 have been more modest than in earlier years. Asking rents ended the fourth quarter at $24.81 per square foot, up 2.6 percent from one year ago.
  • Investment sales volume posted a minimal 5 percent year-over-year decline to 2018’s $2.47 billion. The median price per square foot for 2018 was up 17 percent to $176, with cap rates at 6.9 percent.

Summary:

The Greater Phoenix office market had a strong performance for 2018. While absorption was positive in the fourth quarter, it did not match the more than 1.1 million and 1.3 million square feet highs recorded in the third and first quarters respectively. One reason for the dip in net absorption is the shrinking number of large blocks of space in desirable submarkets. This will be somewhat alleviated in the coming quarters, as a handful of spec projects are scheduled to come online throughout 2019.

The local office market is being supported by a robust pace of employment growth. During the 12-month period ending in December, employers have added more than 79,700 net new jobs, an increase of 3.9 percent. Gains in the office-using sectors have been as robust over the year, with more than 24,000 white-collar positions having been added in the past year, representing growth of 4.15 percent.

While office property’s sales volume dipped slightly during the fourth quarter, overall the number of transactions increased on both an over the quarter (15 percent increase) and yearly basis (25 percent increase). Median price during the fourth quarter ($161) was down from second quarter’s peak ($204); nonetheless 2018’s median price of $176 is a 17 percent increase over year end 2017. Cap rates have continued to remain low, even as interest rates have pushed higher.

Cap rates have averaged in the high-6 percent to low-7 percent range for much of 2018, reflecting the elevated investor interest in quality office assets. 

Office Market Colliers International in Arizona

Outlook:

The outlook for the Greater Phoenix office market remains bright, as local businesses continue to expand and new companies are bringing operations to the Valley. Over 2018, approximately one dozen companies announced plans to add workers in Greater Phoenix, highlighted by IT consulting company Infosys’s plan to more than double the company’s workforce in Arizona by adding 1,000 white-collar workers over the next five years. Other announcements include Nationwide Insurance’s North Scottsdale regional campus development and Deloitte’s new Gilbert operations center, all of which account for thousands of new jobs to be added over the course of several years.

Strong job growth is supporting demand for office space, and with the overall vacancy rate tightening, new development is gaining momentum. Projects totaling more than 3 million square feet are under way, up more than 75 percent from the amount of space under construction one year ago. Development of new projects, or additional phases of current projects, will likely enter the development pipeline in the coming quarters.

While there is the potential for rising interest rates to act as a drag on prices, it has yet to materialize in market pricing as investor demand has been strong enough to offset any rises in borrowing costs.