Tenant touring activity improved in Q1 2021 as vacancy increased
First quarter 2021 was the second consecutive quarter of negative net absorption in the Greater Phoenix office market, posting -372,905 square feet during the three months.
Vacancy rates rose to 13.8 percent during first quarter, which was an 80-basis-point elevation quarter-over-quarter and 150-basis-point increase year-over-year. Sublease availability slowed in January, but then increased in February and March. The first quarter brought 916,467 square feet of additional sublease space to the market, which was a 29.1 percent increase over the quarter and 126.1 percent year-over-year.
Scottsdale Airpark and Central Scottsdale experienced the largest increases in vacancy, rising to 16.7 and 15.7 percent, respectively. Central Scottsdale experienced Nationwide Insurance vacating its four locations in that area, relocating to its new campus at Cavasson. Two new Class A building came online in Scottsdale Airpark, adding 345,988 square feet of direct vacant space. The Airport Area is the only submarket that has posted a decrease in vacancy both year-over-year and quarter-over-quarter.
Since the delivery of vaccines has picked up pace, confidence in returning to the office has dramatically increased leasing interest. Downtown South and Tempe posted the most leasing during first quarter. The law firm Snell & Wilmer committed to relocating and downsizing from One Arizona Center to Cityscape, taking 116,000 square feet. Alliance Bank is expanding its footprint within the same building by nearly 48,000 square feet.
Asking rental rates remained relatively steady, with a slight decrease due to discounted rents offered by a growing amount of sublease opportunities. The average asking rental rate settled at $27.48 per square foot at the end of March, which reflects a decrease of 0.19 percent over-the-quarter and a decline of 0.75 percent year-over-year.
Asking rental rates fell slightly in both Class A and Class B categories. Suburban submarkets posted rental rate increases both over-the-quarter and year-over-year with Chandler, Deer Valley/Airport, Gateway Airport/Loop 202, Loop 303/Surprise and West–I-10 all posting higher rental rates. The impact of discounted sublease space has impacted the Airport Area, Scottsdale Airpark and Tempe the most.
During first quarter, developers delivered the largest amount of new space since first quarter 2017. Approximately 1,187,151 new square feet were delivered, with just 38.3 percent coming online vacant. This is largely reflective of the 289,123 square feet of new Nationwide Insurance space. Construction activity currently is low, down 34.1 percent over-the-quarter and down 40.2 percent year-over-year.
Office building investment sales volume during first quarter totaled $451 million. This is up 96 percent year-over-year, but down 36 percent compared to fourth quarter 2020. The median price per square foot increased to $192, marking the fourth highest quarter in history, but falling behind 2018 peak prices.
The largest transaction last quarter was the sale of PetSmart’s corporate headquarters. The three-building campus, containing 368,672 square feet, sold for $110 million. The second largest sale was the $103 million sale of Anchor Center East and West. Deer Valley and the Camelback Corridor had the highest sales volume by submarket, combined to comprise more than 54 percent of the sales volume.
While the market has struggled during the COVID crisis, Phoenix is still viewed as a top-tier market for businesses relocating and expanding. Improving momentum of office space tours is encouraging, but companies are still hesitant to make office space commitments. As the blanket of COVID-19 lifts, the Greater Phoenix market is expected to return to dynamic leasing activity, business expansion and in-migration of companies relocating to the city.
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