Q3 2019 Office Market
- Greater Phoenix continues to remain in the Top 5 metros for job creation in the country, albeit with moderating growth. During the 12-month period ending in August, preliminary estimates show that employers added 57,800 net new jobs, an increase of 2.7 percent but below the 62,500-average increase over the first half of 2019.
- According to the BLS (Bureau of Labor Statistics), over-the-year nonfarm employment rose in 32 of the 51 metropolitan areas with a 2010 Census population of 1 million or more, while employment was essentially unchanged in 19 areas.
- Overall the Greater Phoenix office market had a strong third quarter; net absorption remained positive with nearly 1 million square feet absorbed. In fact, Q3 2019’s reading is the second highest absorption amount since 2015, with Q3 2018 remaining the highest third quarter reading at 1.11 million square feet.
- Employers continue to add workers. In fact, since July 2019, a little over 14,000 new jobs have been announced which, in turn, is fueling tenant demand for office space and new development.
- Despite delivering 2.4 million square feet through the third quarter of this year, vacancy continues to remain below 14 percent, after dropping 250 bps over-the-year to its current 13.4 percent amount.
- Continued vacancy declines are supporting rent growth with asking rents ending the third quarter at $24.04 per square foot, up nearly 3 percent from one year ago.
- Investment sales volume increased over-the-quarter by 8 percent to $756 million across 54 transactions and below Q3 2018’s high of $866 million. The median price per square foot decreased slightly to $168, with cap rates resting at 7.5 percent.
Outlook: The outlook for the Greater Phoenix office market continues to remain bright in both the mid-to-near-term as local businesses continue to expand and new companies continue to bring operations to the Valley. Since July 2019, a little over 14,000 new jobs have been announced with some 40 percent concentrated in the Scottsdale/North Tempe submarket areas.
While the rate of job growth has slowed, employers are continuing to add employees which supports the need for office space, and with the overall vacancy rate staying below 15 percent, new development is gaining momentum. Projects totaling a little over 2 million are under way and development of new projects, or additional phases of current projects, will likely enter the development pipeline in the coming quarters.
Real estate markets remained robust for most of the third quarter and the drag on real estate prices many were expecting, as a result of rising rates now reversing, has not materialized. With a more dovish Fed, deepening negative rates in Europe, demand for commercial real estate assets should continue to increase, especially as yields plummet and as investor need for cash flowing vehicles, due in large part to changing demographics, continues to rise.