Western Real Estate Business

AUG 2018

Western Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in the Western United States.

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M A R K E T H I G H L I G H T: P H O E N I X 24 • August 2018 • Western Real Estate Business www.REBusinessOnline.com INDUSTRIAL MULTI-FAMILY COMMERCIAL www.mcshane-construction.com SAFETY, QUALITY, COLLABORATION After a slow start to the year, activi- ty in the Phoenix office market picked up in the second quarter to keep posi- tive momentum going through 2018. The overall vacancy rate for Metro Phoenix dropped 134 basis points over the past year to 16.23 percent at the end of the second quarter, the lowest since the first quarter of 2007. Vacancy for Class A office is 10.22 percent (second quarter) and aver- age rent is $34.23 per square foot, the highest since the fourth quarter of 2017. The market continues to be led by new product, as exemplified by a 3.5 percent vacancy rate within the six Class A office developments built speculatively since 2012. Va- cancy continued to contract in the most high-demand submarkets in the metro, including Tempe, South Scott- sdale and Downtown Phoenix. Nota- bly, Tempe has a vacancy rate of 4.81 percent and 2.08 percent for Class A product. Net absorption this quarter totaled 742,568 (year to date 897,284) square feet, putting Metro Phoenix on pace for its fourth consecutive year of at least 2 million square feet of absorption. Tenant demand was notable across Downtown Phoenix, Tempe and South Scottsdale in the first half of the year, as well as in the Southeast Valley. Activity was strong and in- cluded several new-to-market (or submarket) tenants. Quicken Loans relocated from North Scottsdale to a 150,000-square-foot space in Down- town Phoenix; Liberty Mutual en- tered the Southeast Valley submar- ket with 130,000 square feet; Deloitte signed a 100,000-square-foot lease for a new line of business in the South- east Valley; and Indeed entered the Phoenix market with 55,000 square feet in South Scottsdale. A lack of available space and new construction of Class A product in high-demand areas like Tempe and the Southeast Valley has increased the need for build-to-suit development. Several significant build-to-suits over the past 12 months include Freedom Financial's 300,000-square-foot space in Tempe; McKesson's 270,000-square- foot Arizona regional office in South Scottsdale; and Aetna's 80,000-square- foot space in the South Airport sub- market. The scarcity of space in tight sub- markets has also pushed renewal rates higher and concession packages lower. Tenant improvement allowance pack- ages have stayed relatively flat as rates increase along with lower concessions. This is largely due to uncertainty and rising construction costs. Tightening vacancy and rising rents have motivated developers to build speculatively again. This includes projects like the Watermark Tempe and the Grand at Papago Park, both in Tempe. Presently, Metro Phoenix has 2.6 million square feet of product under construction with speculative development accounting for 70 per- cent of new inventory. Of the specu- lative product, 942,500 square feet is located within the Southeast Valley. More than 1.2 million square feet of the product under construction Val- ley-wide is Class A. Investment sales also thrived dur- ing the first half of 2018, with several deals breaching the $300 per square foot barrier. Notable sales included New York Life's acquisition of 24th at Camelback in Phoenix from Hines for $100 million, or $330.90 per square foot. There was also 90 Mountain View, a single-tenant building occu- pied by PayPal that traded for $329.50 per square foot, equating to a 5.4 per- cent cap rate. Phoenix is in the throes of a land- lord-favorable market that should continue to improve in the near-term. With strong projected absorption ac- tivity, rates will likely continue to see upward pressure in high-demand submarkets. Optimism in market fun- damentals has resulted in the devel- opment of several projects that will offer a level of Class A product pre- viously unseen in the market. These projects, along with a healthy labor market, should allow for continued economic growth and robust activity from new-to-market users. ROBUST ACTIVITY CHARACTERIZES PHOENIX'S OFFICE MARKET Bryan Taute Executive Vice President, CBRE

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