Absorption and rental rates improve as sublease inventory rises
PHOENIX – The Greater Phoenix office market posted the highest level of net absorption since the pandemic began. A report released by Colliers in Arizona outlines strong absorption and rental rate increases, despite a rise in sublease availability.
Second quarter posted 517,623 square feet of net absorption, bringing the year-to-date total to 364,044 square feet. This robust activity is attributed to strong leasing activity and robust pre-leasing of new projects. The 100 Mill project in Tempe was completed, adding 287,000 square feet of new Class A space that was 92 percent pre-leased. This completion helped Tempe become the top submarket for net absorption in second quarter, followed by Scottsdale Airpark and Chandler. Large leases signed during second quarter include Vensure Employee Services committing to 96,693 square feet at Allred Park Place #7 in Chandler and Tech Data committing to 51,217 square feet at The Commons at Rivulon in Chandler. Cavasson in the Scottsdale Airpark experienced multiple large leases this past quarter, bringing the 460,000-square-foot Phase I building to 97 percent leased status.
Direct vacancy of office space finally experienced a decline after multiple quarters of increases. Direct vacancy fell 60 basis points over the quarter and 70 basis points year-over-year to 13.5 percent. Class A properties posted the most significant decline, dropping 70 basis points to 16.7 percent. However, due to large move-outs in the second half of 2021, vacancy is still 150 basis points higher than mid-year 2021. Vacancy in Class B assets declined 60 basis points over-the-quarter and 170 basis points year-over-year to 12.8 percent. The largest decreases in vacancy during the quarter occurred in Scottsdale Airpark and Chandler submarkets, falling 2.8 percent and 2.0 percent ending at 12.6 and 10.8 percent, respectively.
Sublease availability slowed down early in second quarter, but that momentum was short lived. May and June brought more than 22 new subleases to the market, including Centene Corporation putting 216,130 square feet on the market. PayPal put 188,730 square feet into the pool and Northern Trust added 150,000 square feet to the market. Second quarter brought an additional 740,568 square feet to the sublease market, bringing sublease availability to 6.2 million square feet. This amounts to 3.8 percent of the metro area’s total office inventory.
Strong fundamentals in the office market have encouraged positive, sustainable rental rate growth. Overall asking rates finished the quarter at $28.62 per square foot, which was a 3.7 year-over-year increase and 1.7 percent rise from March. Rents in Class A products have shown a slower pace of growth, posting a 0.73 percent quarter-over-quarter improvement and finishing at $31.62 per square foot. Class B assets witnessed greater growth, improving 1.7 percent over-the-quarter and 4.2 percent year-over-year to $25.76 per square foot. New construction in Tempe and Camelback Corridor submarkets are achieving top rents because of the rich array of amenities they offer. 100 Mill in Tempe and The Grove on Camelback Corridor have both reached rates over $50.00 per square foot.
Currently, 1.7 million square feet of new office space are under construction in Greater Phoenix with 39 percent pre-leased. Two speculative projects, Scottsdale Entrada and The Grove, are expected to be completed during third quarter, adding nearly 500,000 square feet to inventory. For the first time ever, the West I-10 submarket leads the Valley with the most amount of office product under construction, led by Goodyear City Square and Litchfield Park Square.
Investment sales of office properties reached $708 million during second quarter. This marks a 22.2 percent decline quarter-over-quarter, but an increase of 70.0 percent year-over-year. Median price per square foot paid during second quarter was $180.84, a decrease of 8.1 percent quarter-over-quarter and a slight decrease of 0.97 percent year-over-year. Comparing first half 2022 to first half 2021, sales volume increased by 90 percent to $1.6 billion and median price per square foot is up 5.0 percent to $196.13. The biggest transaction in second quarter was the $172 million sale of High Street, a 519,187-square-foot mixed-use project in Scottsdale. Harbert Management Corporation sold the property to Rood Investments.
The Phoenix office market is expected to remain stable, despite concerns about the economy. The diversity of industries that have moved into the market, rapid growth and future pipeline of the labor force will enable the city to weather fluctuations in the economy. The influx of new companies helps buoy our office market, including the big announcement during second quarter that communications company Viasat will be expanding at Arizona State University Research Park. The company already occupies 210,000 square feet at the park, but is planning to building a multi-phase, build-to-suit campus that will allow the company to triple the size of its current Tempe workforce.
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