Q3 2012 – NAI Office Market Report

The Phoenix Office Market trudged along during the third quarter with mediocre growth. The Coincident Index for Phoenix, which includes four indicators: nonfarm payroll employment, the unemployment rate, average hours worked in manufacturing, and wages and salaries, increased during the third quarter from approximately 179 to 180.5. Another measurement of job growth that has impact on the Phoenix office sector is the Professional and Business Services Employment rate. According to the Bureau of Labor Statistics, the number of individuals employed in Arizona in these fields increased to approximately 348,000 from 355,000 during the third quarter.

The third quarter recorded positive absorption at 467,529 SF, marking a 22% decrease from the 570,000 SF absorbed in the second quarter. The Tempe and Central Scottsdale submarket posted the highest positive absorption figures at 219,820 SF and 158,417 SF, respectively. The Deer Valley submarket recorded the highest negative absorption figures, with (8,879) SF of space. This movement is consistent with recent trends; tenants are continuing their flight to higher quality space driven by accessibility. According to data, such Class A properties are being met with the highest demand.

Square footage leased totaled 1.6 million SF this quarter, compared to the 2.6 million SF recorded in the second quarter. Sales data recorded an even larger downfall; the total dollar volume of sales declined nearly 80% to $25.33 million. The top lease transactions during this quarter included: the 139,404 square foot lease at 4500 E Cotton Center Blvd in Phoenix signed by Aetna, the 138,240 square foot lease at 444 N 44th Street in Phoenix signed by State Farm Mutual Automobile, and the 105,000 square foot lease at 2222 W Dunlap Ave in Phoenix to United Healthcare.

The office vacancy rate declined slightly during the third quarter to 20.0%, an improvement from the second quarter rate of 20.2%. However, the slight improvement in vacancy did not translate to increased rents. Rental rates are still being priced by tenants; demand is not strong enough for price increases to take effect. Rental rates in the third quarter dropped to $20.18 per SF from $20.20 in the second quarter. The supply of vacant space must still be worked through for rental rates to trend up.

Office building construction matched the low levels seen during the second quarter. There were no new construction starts this quarter, and only 55,617 SF of space was delivered. There is currently 374,390 SF of space under construction. On a positive note, the final phase of Hayden Ferry Lakeside, a Class A office tower in Tempe, will potentially begin construction in the future quarters. This project has been stalled since the recession began and marks the first anticipated high-rise to break ground in Tempe since 2007.

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