PHOENIX—After a fairly steady first half of the year, the Greater Phoenix office market strengthened in the third quarter. Tenants moved into a net of more than 950,000 square feet in the past three months, topping the total for the first half of the year and marking the strongest single quarter of net absorption in Greater Phoenix in two years, according to a report by Colliers International of Greater Phoenix. This renewed tenant demand is forecast to continue in the coming months, particularly as heavily pre-leased buildings become available. This tenant demand for space is also supporting rent growth in the market.

Rents have been on the rise for more than two years and the pace of growth is accelerating as market conditions tighten. Rents are also receiving a boost from the delivery of new, expensive space in many high-demand submarkets. Two of the properties currently under construction feature some of the highest asking rents in all of Greater Phoenix, reaching $40 per square foot in a few instances.

Phil Breidenbach, executive vice president at Colliers International in Greater Phoenix, tells GlobeSt.com: “Increased absorption continues, making us all optimistic, but now demand is robust among small/medium size businesses as well, and in submarkets dormant for years–a sign not just the office market, but the entire economy, is again thriving.”

One indicator of the strengthening in the local office market is the improvement being recorded in a greater number of submarkets. In the earlier stages of the office recovery, improvement was concentrated in only a handful of submarkets, while conditions remained soft in many other areas. In recent quarters, operating fundamentals in areas such as North Phoenix and Mesa, AZ have begun to improve although the West Valley has yet to generate much momentum.

The surge in net absorption fueled a vacancy decline in the third quarter, following only modest improvement in the first half. Vacancy ended the third quarter at 17.6%, 100 basis points lower than one year ago. Development of new office buildings is on the rise, with approximately 2.5 million square feet expected to become available in 2015. The new construction includes a mix of spec and build-to-suit projects.

“Decreasing vacancies and rising rents will prompt much needed spec development. Spec building success is happening now in Chandler, where our 81,770-square-foot Chandler Corporate Center III project, built on spec, secured a tenant for over 93% of the building within weeks of completion, and construction on the 85,310-square-foot Chandler Corporate Center IV, to start on spec in November, is already attracting tenant interest,” says Breidenbach.

Asking rents continue to trend higher, advancing 1.6% in the third quarter. During the past 12 months, average asking rents have gained 4.2%, and average class-A asking rents have spiked 7.1% since the third quarter of 2014. Sales of office buildings slowed minimally in the third quarter, but year-to-date activity is ahead of the 2014 pace. The median price in transactions to this point in 2015 is $134 per square foot, 19% higher than one year ago.

Instant Insights /

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