Research & Forecast Report GREATER PHOENIX | OFFICE 4Q 2017 Office Sales and Leasing Activity Picks Up to Close 2017 Key Takeaways > Conditions in the Greater Phoenix office market bounced back during the fourth quarter after a slowdown in the third quarter. Vacancy crept lower and net absorption gained momentum. > Vacancy fell by 20 basis points during the fourth quarter, ending 2017 at 16.1 percent. The rate inched down 10 basis points from one year earlier. This marked the seventh consecutive year where office vacancy has improved in Greater Phoenix. > The average asking rent rose 3.3 percent in 2017, closing the fourth quarter at $24.40 per square foot. This marked a deceleration in the pace of rent growth; asking rents advanced by more than 5 percent per year in both 2015 and 2016. > Sales activity picked up to close the year, highlighted by a record- setting sale of the State Farm regional headquarters at Marina Heights. The median price rose and cap rates compressed during the fourth quarter. Greater Phoenix Office Market The Greater Phoenix office market rebounded a bit during the fourth quarter following modest activity levels in the preceding three months. For the full year, net absorption totaled more than 1.7 million square feet, representing more than 1 percent of total inventory, but down from 2014-2016 levels, when the market averaged net absorption of more than 3 million square feet per year. While the absorption totals in 2017 lagged figures from recent years, there was sufficient tenant activity to drive the vacancy rate lower for the seventh straight year. One of the forces that has influenced the cooling pace of absorption has been the slowing rate of job growth. Employment growth averaged more than 50,000 net new jobs per year from 2012- 2016, but the final total for 2017 will likely be closer to 45,000 new positions. The slowdown is most dramatic in white-collar industries. Growth in office-using employment sectors averaged Summary Statistics Phoenix Market Phoenix Class A Phoenix Class B Vacancy Rate 16.1% 14.8% 17.3% Change from 4Q 2016 (bps) -10 -20 0 Net Absorption (thousands SF) 539 (61) 363 New Construction (thousands SF) 287 271 16 Under Construction (thousands SF) 1,696 1,463 232 Asking Rents Per Square Foot Per Year $24.40 $28.70 $22.68 Change from 4Q 2016 3.3% 2.6% 3.3% Market Indicators Relative to prior period Market Q4 2017 Market Q4 2016 Vacancy Net Absorption Construction Rental Rate Fourth Quarter Employment Trends* Total Nonfarm Phoenix Metro Office-Using Phoenix Metro Total Nonfarm United States Office-Using United States *Source: Bureau of Labor Statistics
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Research & Forecast Report
GREATER PHOENIX | OFFICE4Q 2017
O� ce Sales and Leasing Activity Picks Up to Close 2017Key Takeaways > Conditions in the Greater Phoenix offi ce market bounced back during the fourth quarter after a slowdown in the third quarter. Vacancy crept lower and net absorption gained momentum.
> Vacancy fell by 20 basis points during the fourth quarter, ending 2017 at 16.1 percent. The rate inched down 10 basis points from one year earlier. This marked the seventh consecutive year where offi ce vacancy has improved in Greater Phoenix.
> The average asking rent rose 3.3 percent in 2017, closing the fourth quarter at $24.40 per square foot. This marked a deceleration in the pace of rent growth; asking rents advanced by more than 5 percent per year in both 2015 and 2016.
> Sales activity picked up to close the year, highlighted by a record-setting sale of the State Farm regional headquarters at Marina Heights. The median price rose and cap rates compressed during the fourth quarter.
Greater Phoenix Offi ce Market
The Greater Phoenix offi ce market rebounded a bit during the fourth quarter following modest activity levels in the preceding three months. For the full year, net absorption totaled more than 1.7 million square feet, representing more than 1 percent of total inventory, but down from 2014-2016 levels, when the market averaged net absorption of more than 3 million square feet per year. While the absorption totals in 2017 lagged fi gures from recent years, there was suffi cient tenant activity to drive the vacancy rate lower for the seventh straight year.
One of the forces that has infl uenced the cooling pace of absorption has been the slowing rate of job growth. Employment growth averaged more than 50,000 net new jobs per year from 2012-2016, but the fi nal total for 2017 will likely be closer to 45,000 new positions. The slowdown is most dramatic in white-collar industries. Growth in offi ce-using employment sectors averaged
more than 4 percent per year for the past five years, but will total less than 2 percent in 2017. The forecast for 2018 calls for continued job growth across several industries in Greater Phoenix.
Investment activity gained momentum during the fourth quarter and the improving investor sentiment was highlighted by the record-
setting sale of the Marina Heights project in Tempe. The five-building project was constructed for State Farm and came online beginning in 2015, with the final phase completing in early 2017. The project sold for more than $900 million, a record figure for a commercial real estate transaction in Greater Phoenix and one of the five largest office sales in the United States in 2017.
OFFICE SALE ACTIVITY
Property Address Submarket Sale Date Sale Price Size SF Sale Price SF Class
300-600 E Rio Salado Pky., Tempe Tempe 12/7 $928,000,000 2,024,139 $459 A
4150 & 4250 N Drinkwater Blvd., Scottsdale Scottsdale South 12/22 $68,933,000 226,112 $305 A
3333 E Camelback Rd., Phoenix Camelback Corridor 12/19 $21,250,000 96,248 $221 B
Recent Transactions in the Market
OFFICE LEASE ACTIVITY
Building Name/Address Submarket Lease Type Tenant Size SF Class
3201 E Elwood St., Phoenix Airport Area Sublease Texacle 77,132 B
4301 N Scottsdale Rd., Scottsdale Scottsdale South Expansion Indeed 52,641 B
2550 W Union Hills Dr., Phoenix Deer Valley Move In Waste Management 47,568 B
0%
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(1,500,000)
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VacancySq
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Net Absorption Deliveries Vacancy* Forecast
Historical Absorption, Deliveries and Vacancy Rates
Greater Phoenix Office Market (continued)
UPDATE!
3 Greater Phoenix Research & Forecast Report | 4Q 2017 | Office | Colliers International
Vacancy: > Vacancy dipped to close 2017, falling 20 basis points in the fourth quarter to 16.1 percent. The local vacancy rate was steady throughout the year, remaining in a very tight band and never going above 16.5 percent or below 16 percent. Vacancy dipped 10 basis points from the year-end 2016 figure.
> After dipping to its lowest point since 2007 during the third quarter, vacancy in Class A buildings inched higher during the final three months of this year. Class A vacancy rose 60 basis points from the third quarter to the fourth quarter, ending 2017 at 14.8 percent.
> While vacancy has been declining across the Greater Phoenix market for the past several years, there are still areas in the market where the rate remains elevated. Vacancy is above 20 percent in the Downtown North, Airport Area and Northwest Phoenix submarkets.
> Forecast: Vacancy is forecast to dip by 50 basis points in 2018, falling to 15.6 percent. The rate has improved in each of the past seven years, although annual declines were more significant earlier in the recovery cycle.
Absorption and Leasing Activity: > Following a third quarter where net absorption was minimal, conditions strengthened during the fourth quarter. Net absorption totaled nearly 540,000 square feet in the fourth quarter, similar to figures recorded in late-2016 and during the first half of this year.
> After averaging more than 3 million square feet during the past three years, net absorption in 2017 was a tick over 1.7 million square feet. A decline in build-to-suit deliveries and a few prominent tenant move-outs were largely responsible for the drop-off in net absorption.
> Tenant demand in the Camelback Corridor submarket was positive for the sixth consecutive year in 2017. Net absorption totaled more than 262,000 square feet in the Camelback Corridor in 2017, and the amount of vacant space in the submarket has been cut in half since late-2011.
> Forecast: After slowing in 2017, net absorption is forecast to gain momentum in the year ahead. Net absorption should total approximately 2.5 million square feet in 2018.
Rental Rates: > Rents continued to push higher, although the pace of growth slowed in 2017. Asking rents posted a 3.3 percent increase in 2017, ending the year at $24.40 per square foot. Rents rose by more than 5 percent per year in both 2015 and 2016.
Vacancy by Property Class
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Vacancy
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Asking Rent Trends
Vacancy Among Major Submarkets
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4Q 2017 4Q 2016
$18
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4Q2014
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4Q2017
Aver
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ent (
per S
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Class A Market Average
44 Greater Phoenix Research & Forecast Report | 4Q 2017 | Office | Colliers International
> Rents are increasing across all classes of the market, with the strongest gains being recorded in the lower tiers. Asking rents in Class C buildings spiked by more than 6 percent in 2017. The increase can be attributed to the tightening availability of space throughout the market, resulting in fewer affordable options for tenants.
> Average asking rents in two submarkets ticked above $30 per square foot in 2017. The highest average asking rents in Greater Phoenix are in the Scottsdale South submarket followed by the Camelback Corridor submarket. Both submarkets posted annual rent increases of approximately 4 percent in 2017.
> Forecast: Asking rents have increased in each of the past five years and are forecast to rise again in 2018. Rent growth will likely be in the 4-percent range across the Greater Phoenix metro area in 2018.
Construction: > Construction picked up somewhat during the fourth quarter, totaling more than 287,000 square feet after very little new office space came online in the third quarter. During the second half of 2017, less than 360,000 square feet of office space was delivered, the lowest two-quarter total since late-2013/early-2014.
> For the full year, approximately 2.1 million square feet of new construction was delivered, down from more than 2.3 million square feet in 2016.
> Projects totaling nearly 1.7 million square feet were under construction at year-end 2017, up approximately 5 percent from the figure one year ago.
> Forecast: Construction will slow to approximately 1.5 million square feet in 2018, down from more than 2.1 million square feet in 2017.
Investment Trends: > Sales transactions of office buildings ticked up during the fourth quarter, rising by more than 10 percent from the third quarter total. Dollar volume surged in the fourth quarter, fueled by the $928-million sale/leaseback of the Marina Heights project in Tempe.
> The median price in properties that sold during the fourth quarter was $184 per square foot, up more than 30 percent from the figure in the third quarter. The median price for all of 2017 was $138 per square foot, a 6 percent increase from the 2016 median price. Larger properties are selling at higher prices; the median price in sales of buildings over 100,000 square feet was $201 per square foot in 2017.
> Cap rates dipped below 7 percent during the fourth quarter, bringing the average for all of 2017 to 7.5 percent. Cap rates in 2017 were down approximately 30 basis points from the 2016 average.
Rental Rates (continued): Employment Overview
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Average Cap Rate
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Construction Trends by Submarket
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5 Greater Phoenix Research & Forecast Report | 4Q 2017 | Office | Colliers International
Office MarketEXISTING PROPERTIES DIRECT VACANCY SUBLEASE VACANCY TOTAL VACANCY NET ABSORPTION - SF NEW SUPPLY - SF UNDER CONSTR AVG. RENT
CLASS BLDGS. TOTAL INVENTORY SF SF RATE SF RATE SF Q4-17 Q4-16 CURRENT
As new, corrected or updated information is obtained, it is incorporated in both current and historical data, which may invalidate comparison to previously issued reports.
8 North American Research & Forecast Report | Q4 2014 | Offi ce Market Outlook | Colliers International
Pete O’NeilResearch Director | Greater Phoenix+1 602 222 [email protected]
Outlook: The Greater Phoenix offi ce market is forecast to have another year of improvement in 2018. Tenant demand will likely remain healthy as businesses continue to expand. After a slowdown in 2017, the pace of expansion could receive a boost as the economy has gained momentum, consumer confi dence is elevated and corporate tax rates have been cut. These measures should support a favorable business climate in the year ahead.
One of the signifi cant shifts occurring in the Greater Phoenix offi ce market is the move from build-to-suit construction to spec development. In recent years, construction has been dominated by build-to-suit developments for State Farm, McKesson and others. Looking forward, approximately 70 percent of the square footage
currently under construction is spec development. Many of these projects are slated to come online in the second half of 2018, allowing time for these buildings to be leased ahead of delivery.
The outlook for the investment market remains healthy, due in large part to strengthening property performance which has buoyed investor sentiment. In 2017, fewer offi ce buildings sold but transaction sizes were larger. Buildings of over 100,000 square feet accounted for nearly 20 percent of transactions in 2017, up a few percentage points from 2016. In addition, nearly 30 percent of all offi ce sales topped $10 million in 2017. These trends suggest that larger transactions will likely play a more prominent role in the local offi ce investment market in the year ahead.