Middle Market Digest: This Week in Southwest

Construction is taking off in the Southwest market. A new report from Colliers International shows a boost in office construction throughout the market, driven by lower vacancy rates—now at 15.5%— and strong absorption. The report wasn’t the only sign that construction is doing well. This week, there were several new developments started from affordable and senior housing projects to luxury apartment projects and residential communities. Housing continues to dominate the construction activity in the Southwest as well as in the investment sector. Here’s a look at this week’s trends, announcements and deals that you may have missed in Southern California, Utah, Arizona and Nevada.

BY THE NUMBERS

PHOENIX—Strong net absorption and a 15.5% vacancy rate in the office market has spurred new construction. This is all noted in a recent first quarter report released by Colliers International in Greater Phoenix. Office tenants moved into a net of approximately 679,000 square feet during the first three months of the year. This net absorption level was a retreat from fourth quarter 2017, but stronger than first quarters of previous years. Office vacancy fell 30 basis points during the first quarter, dipping to 15.5% across the metro area. This level is now 90 basis points lower than a year ago and is the lowest rate in nearly a decade. First quarter vacancy performance marked a full year of quarterly declines in Greater Phoenix. Strongest improvements in vacancy occurred in the Southeast Valley, including Tempe, Chandler and the Superstition Springs submarkets. These areas of the metro area have experienced strong employment growth in recent years. Class-A properties had reached a below-15% vacancy by yearend 2017. The city is now seeing more improvement in class-B properties in which vacancy has dropped 100 basis points in the past 12 months to 16%. Asking rental rates in Greater Phoenix reached an average of $24.68 per square foot in the first quarter of 2018, rising 3.9% year over year. Rates are expected to rise approximately 4.5% during this year. Rental rate advances are stronger in class-B properties than class-A, though both are showing improvement. Class-A asking rents are expected to push higher this year as a result of new developments coming online. Construction trends have begun shifting towards the office market. Developers are increasingly putting speculative projects in the construction pipeline. Currently, more than 1.5 million square feet of spec space is underway, which is nearly double the total a year ago. Delivery of new projects had slowed in the past 12 months, totaling less than 1.4 million square feet. The pipeline is now filling with more than 2.8 million square feet of spec and build-to- suit office space under construction, 2.2 million of which is slated for completion during 2018.