PHOENIX, AZ – January 15, 2012 – (RealEstateRama) — After years at the bottom of the commercial real estate barrel, the Phoenix offi ce market has improved throughout the year and ended at a new high mark that should bode well for 2013. With the economy gaining steam, offi ce sector hiring up and net migration increases to the Valley have all added to the pace of activity in the fourth quarter. There is greater certainty regarding political and taxation issues being resolved. Companies should be more confi dent to predict future earnings by investing earlier in the process which will accelerate business activity. Absorption was the star this quarter as new lease and move-in activity created an optimistic environment. Sales velocity was markedly higher this quarter as investors took advantage of remaining bargains in the market.
Still, declining rental rates remain a problem. With high vacancies still affecting the overall offi ce sector, rates will remain suppressed for some time to come. On the other hand, lessees continue to benefi t from the lower rates, greater tenant improvements and term concessions. There is unlikely to be rent growth soon throughout all product types outside select Class A properties.
Sales velocity was strong this quarter as investors worked feverishly to close deals. “There was an uptick in the number of transactions, total sales volume and price per square foot,” said Lee & Associates Senior Research Analyst, Matt DePinto. “As investors expand their choices in the offi ce market rather than securing just signature assets as was the case during 2009-2011, there is a growing availability of product that is proving to have outstanding investment potential,” he added.
The Fundamentals
The Phoenix offi ce vacancy rate for the fourth quarter posted at 24.0%, a dramatic 140-basis point drop from last quarter. Net absorption rose to 927,980 SF for the quarter. This was the highest single quarter absorption since Q4 2006. Year-to-date absorption settled at 2,008,925 SF, the highest since 2007.
Construction activity remains extremely low by historical standards with only one non-medical building under construction. Allred Park Place, Building 5, is a 68,867 SF Class A offi ce building being constructed at 1340 S. Spectrum Blvd in Tempe. Another Allred Park Place building was the only offi ce building delivered this quarter at 1255 S. Spectrum Blvd, in Tempe. Total SF was 92,109.
Asking rental rates dropped again to $20.36 PSF this quarter, down $0.06 PSF from last quarter. The number of submarkets with negative rental rate growth remained the same at eight. The highest increase was in the Arrowhead submarket with a 2.3% increase and the largest drop was in the East Phoenix submarket at -3.0%.
Sales activity was exceptionally strong this quarter with 110 transactions totaling $508,510,997. Average price per square foot was $154.43. The average cap rate was calculated at 7.44%. The largest lease transaction of the quarter was for Humana’s lease of 71,217 SF of Class A space at Anchor Centre, 2231 E. Camelback Rd., in Phoenix. The largest sales transaction for the quarter was for $81M for the 302,209 SF, Class A, 24th at Camelback, 2375 E. Camelback Rd., in Phoenix. Price per square foot was calculated at $268.08.
Outlook
The Phoenix offi ce market fi nished 2012 in a strong position. Continued rising absorption should help to push asking rental rates up as inventories begin to shrink. The lack of construction activity will help in that process. As the U.S. economy continues to improve, political and economic uncertainty will become less of an issue as both political parties will be forced to work toward long-term solutions that provide certainty to the business community. The pace of hiring is also expected to continue to rise along with offi ce-sector hiring, which was somewhat sluggish earlier last year. Net in-migration gains in Arizona should also add new job opportunities for offi ce workers. After a long battering, the Valley offi ce market is ready for its day in the sun.
About Lee & Associates Arizona
Lee & Associates Arizona specializes in providing exceptional commercial brokerage services to the industrial, offi ce, land and investment sectors of the Phoenix commercial real estate market. The Phoenix offi ce was established in 1991 and is now recognized as one of the most successful brokerage fi rms in the state. Each of the 46 nationwide Lee & Associates offi ces has a strong local ownership combined with a powerful platform from the national Lee & Associates network.
Contact:
Matt DePinto
Senior Research Analyst
Public Media Relations
ph: 602.474.9512
mdepinto (at) leearizona (dot) com
www.leearizona.com
