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Despite Restrained Job Growth, Absorption Positive for Third Straight Quarter

tHe brOader vieWThe Greater Phoenix office market ended 2011 on a relative high note, highlighted by a third consecutive quarter of positive net absorption and a modest vacancy decline to 22.1 percent. The recent stabilization in the office market brightens the outlook for 2012, when economic expansion and employment growth are likely to accelerate. While demand will outpace new supply, the metrowide vacancy rate will remain above 20 percent, and rents will likely continue to creep lower for the next few quarters.

current cOnditiOnsnet absorption in the Phoenix office market totaled more than 262,000 square feet in the fourth quarter, after tenants moved into a net of nearly 710,000 square feet in the preceding three-month period. Tenant moves in the past six months more than offset a soft first half of 2011, bringing year-end total net absorption to approximately 614,000 square feet, or 0.5 percent of total inventory.

While the Phoenix metro area recorded positive net absorption as a whole, results were mixed at the submarket level. For the year, only 13 of the 25 submarkets in Greater Phoenix recorded positive net absorption. Absorption was strongest in the downtown South submarket, totaling more than 490,000 square feet in 2011. Attracting tenants to the submarket has come at a cost however, as asking rents in the downtown South submarket have dropped nearly 20 percent over the past two years, nearly double the pace of rent declines for the metro as a whole. Each of the three Scottsdale submarkets recorded positive net absorption in 2011, with the Scottsdale Airpark leading the way as tenants moved into nearly 320,000 square feet.

The submarkets in north central Phoenix recorded the most significant negative net absorption in 2011. A combined total of more than 270,000 square feet of negative net absorption was recorded in the Midtown/Central Phoenix, Piestewa Peak Corridor and Paradise Valley submarkets over the past year. A metrowide flight to quality is the primary cause for the absorption trends in these areas. More than 80 percent of the inventory in these submarkets is Class B or Class C space, and with tenants finding attractively priced Class A options, retaining tenants has proved challenging.

Tenants continued to show a clear preference for top-tier spaces in recent quarters. net absorption of nearly 900,000 square feet in the Class A segment outpaced the metro total for the second consecutive year in 2011, even as delivery of new inventory has been limited. in the 10-year period before 2010,

Continued on back page

market indicatOrs

neW suPPly, absOrPtiOn & vacancy rates

2011 q4 2010 q4

VAcAncYneT ABSORPTiOn

cOnSTRucTiOnRenTAl RATe

emPlOyment4Q emPlOYmenT TRendS*

TOTAl nOnfARm PhOenix meTRO

Office-uSing PhOenix meTROTOTAl nOnfARm

u.S.Office-uSing

u.S.

Q4 2011 | office

18.0

19.0

20.0

21.0

22.0

23.0

0.0

0.6

1.2

1.8

2.4

3.0

2013*2012*20112010

Million Square Feet Vacancy Rate %

New Supply Absorption Vacancy Rate*Forecast

*Bureau of labor Statistics

central business district

downtown northA 14 4,569,966 1,147,157 25.1% 116,021 2.5% 1,263,178 27.6% 21.7% (126,316) (269,923) - - - $20.86 B 87 6,536,952 1,502,422 23.0% 46,388 0.7% 1,548,810 23.7% 23.0% 13,346 (44,931) - - - $18.81 C 50 1,055,324 140,337 13.3% 3,718 0.4% 144,055 13.7% 17.0% 17,007 11,039 - - - $14.43 total 151 12,162,242 2,789,916 22.9% 166,127 1.4% 2,956,043 24.3% 22.0% (95,963) (303,815) - - - $19.50

downtown southA 12 4,985,490 594,854 11.9% 165,281 3.3% 760,135 15.2% 22.9% 3,195 381,633 - - - $26.02 B 25 2,289,224 386,733 16.9% 2,237 0.1% 388,970 17.0% 20.3% 1,166 76,054 - - - $21.97 C 23 591,145 140,408 23.8% - 0.0% 140,408 23.8% 33.3% 2,596 35,712 - - - $13.15 total 60 7,865,859 1,121,995 14.3% 167,518 2.1% 1,289,513 16.4% 22.7% 6,957 493,399 - - - $24.06

suburban44th st. corridorA 20 3,094,917 720,063 23.3% 22,559 0.7% 742,622 24.0% 23.5% (14,238) (14,733) - - - $21.78 B 42 1,930,767 288,382 14.9% 15,331 0.8% 303,713 15.7% 20.9% (22,060) 100,701 - - - $17.87 C 19 648,611 102,192 15.8% - 0.0% 102,192 15.8% 10.2% - (36,122) - - - $14.87 total 81 5,674,295 1,110,637 19.6% 37,890 0.7% 1,148,527 20.2% 21.1% (36,298) 49,846 - - - $20.26

airport areaA 10 1,328,552 222,246 16.7% 165,290 12.4% 387,536 29.2% 23.1% 20,399 257,366 - 439,070 - $24.46 B 114 7,664,188 1,053,355 13.7% 21,709 0.3% 1,075,064 14.0% 11.2% (131,206) (215,370) - - - $18.11 C 21 521,202 47,349 9.1% - 0.0% 47,349 9.1% 10.6% 979 7,831 - - - $12.46 total 145 9,513,942 1,322,950 13.9% 186,999 2.0% 1,509,949 15.9% 12.3% (109,828) 49,827 - 439,070 - $19.28

arrowheadA 1 80,849 8,300 10.3% - 0.0% 8,300 10.3% 27.0% 24,620 13,496 - - - $25.50 B 87 2,222,591 466,932 21.0% 14,022 0.6% 480,954 21.6% 20.2% (28,915) (32,131) - - - $22.22 C 14 270,868 46,907 17.3% - 0.0% 46,907 17.3% 20.3% 5,127 7,957 - - - $18.65 total 102 2,574,308 522,139 20.3% 14,022 0.5% 536,161 20.8% 20.4% 832 (10,678) - - - $22.06

camelback corridorA 24 4,578,683 1,492,654 32.6% 72,640 1.6% 1,565,294 34.2% 31.4% 54,929 (128,108) - - - $26.48 B 85 3,847,075 1,021,960 26.6% 45,227 1.2% 1,067,187 27.7% 28.0% 18,256 11,460 - - - $19.77 C 27 493,034 72,964 14.8% - 0.0% 72,964 14.8% 15.9% - 5,194 - - - $18.20 total 136 8,918,792 2,587,578 29.0% 117,867 1.3% 2,705,445 30.3% 29.1% 73,185 (111,454) - - - $23.61

chandlerA 7 1,071,790 64,836 6.0% - 0.0% 64,836 6.0% 18.1% - 129,117 - - - $28.03 B 111 3,780,868 801,853 21.2% 11,418 0.3% 813,271 21.5% 20.6% 84,138 110,738 - 183,000 - $21.84 C 12 188,166 35,116 18.7% - 0.0% 35,116 18.7% 30.6% 27,111 22,484 - - - $14.52 total 130 5,040,824 901,805 17.9% 11,418 0.2% 913,223 18.1% 20.4% 111,249 262,339 - 183,000 - $21.86

deer valley airportA 21 3,465,687 275,788 8.0% 5,956 0.2% 281,744 8.1% 6.7% (33,418) (48,875) - - - $20.82 B 96 6,166,699 1,501,312 24.3% 71,513 1.2% 1,572,825 25.5% 24.1% 52,513 (85,164) - - 210,202 $20.10 C 10 215,190 55,716 25.9% - 0.0% 55,716 25.9% 26.4% 496 1,083 - - - $10.55 total 127 9,847,576 1,832,816 18.6% 77,469 0.8% 1,910,285 19.4% 18.0% 19,591 (132,956) - - 210,202 $19.97

gateway airport/loop 202*A 0 - - 0.0% - 0.0% - 0.0% 0.0% - - - - - - B 40 1,042,839 413,120 39.6% - 0.0% 413,120 39.6% 42.0% 27,615 24,370 - - - $23.51 C 0 - - 0.0% - 0.0% - 0.0% 0.0% - - - - - - total 40 1,042,839 413,120 39.6% - 0.0% 413,120 39.6% 42.0% 27,615 24,370 - - - $23.51

glendaleA 5 519,333 247,476 47.7% - 0.0% 247,476 47.7% 45.3% 1,633 (11,977) - - - $26.21 B 27 1,278,959 491,087 38.4% 6,060 0.5% 497,147 38.9% 32.7% (58,207) (78,919) - - - $20.46 C 13 383,129 59,982 15.7% - 0.0% 59,982 15.7% 14.3% (300) (5,052) - - - $13.98 total 45 2,181,421 798,545 36.6% 6,060 0.3% 804,605 36.9% 32.5% (56,874) (95,948) - - - $22.24

loop 303/surpriseA 0 - - 0.0% - 0.0% - 0.0% 0.0% - - - - - - B 36 949,018 310,325 32.7% 2,167 0.2% 312,492 32.7% 37.8% (6,388) 46,320 - - - $25.39 C 5 128,914 - 0.0% - 0.0% - 0.0% 0.0% - - - - - - total 41 1,077,932 310,325 28.8% 2,167 0.2% 312,492 29.0% 33.3% (6,388) 46,320 - - - $25.39

mesa downtownA 0 - - 0.0% - 0.0% - 0.0% 0.0% - - - - - - B 19 574,251 120,615 21.0% - 0.0% 120,615 21.0% 20.3% 6,500 (4,116) - - - $15.77 C 16 255,988 61,272 23.9% - 0.0% 61,272 23.9% 20.9% - - - - - $12.75 total 35 830,239 181,887 21.9% - 0.0% 181,887 21.9% 20.5% 6,500 (4,116) - - - $14.15

mesa eastA 0 - - 0.0% - 0.0% - 0.0% 0.0% - - - - - - B 42 1,275,121 162,001 12.7% - 0.0% 162,001 12.7% 10.0% 12,782 (15,151) - - - $17.09 C 28 601,740 122,470 20.4% 5,054 0.8% 127,524 21.2% 23.3% - (600) - - - $12.78 total 70 1,876,861 284,471 15.2% 5,054 0.3% 289,525 15.4% 14.4% 12,782 (15,751) - - - $15.15

midtown/central PhoenixA 0 - - 0.0% - 0.0% - 0.0% 0.0% - - - - - - B 80 2,726,565 451,422 16.6% 14,766 0.5% 466,188 17.1% 14.8% (1,037) (61,351) - - 71,250 $16.59 C 50 970,798 204,112 21.0% - 0.0% 204,112 21.0% 20.5% 4,442 (4,742) - - - $13.15 total 130 3,697,363 655,534 17.7% 14,766 0.4% 670,300 18.1% 16.3% 3,405 (66,093) - - 71,250 $15.71

Office market

ExiSTinG PRoPERTiES diRECT VACAnCy SUBlEASE VACAnCy ToTAl VACAnCy nET ABSoRPTion - SF nEW SUPPly - SF UndER AVG. REnT

ClASS BldGS. ToTAl SF RATE SF RATE SF Q4-11 Q4-10 CURREnT yTd CURREnT yTd ConSTR. SF RATE (FS) inVEnToRy SF PERiod PERiod

P. 2 | cOlliers internatiOnal

research & forecast report | Q4 2011 | Office | PhOenix

northwest PhoenixA 10 1,318,981 193,552 14.7% - 0.0% 193,552 14.7% 23.1% 19,022 111,686 - - - $20.72 B 118 5,055,403 1,326,596 26.2% 13,768 0.3% 1,340,364 26.5% 25.3% 1,318 (63,476) - - - $16.26 C 99 2,031,864 437,030 21.5% - 0.0% 437,030 21.5% 19.8% 18,452 (37,334) - - - $11.28 total 227 8,406,248 1,957,178 23.3% 13,768 0.2% 1,970,946 23.4% 23.6% 38,792 10,876 - - - $16.31

Paradise valleyA 13 1,470,552 425,218 28.9% 41,571 2.8% 466,789 31.7% 31.4% 24,889 (5,587) - - - $22.01 B 55 1,962,876 456,274 23.2% - 0.0% 456,274 23.2% 20.4% (22,736) (54,979) - - - $20.28 C 26 451,966 58,752 13.0% 560 0.1% 59,312 13.1% 10.6% (967) (11,454) - - - $14.39 total 94 3,885,394 940,244 24.2% 42,131 1.1% 982,375 25.3% 23.4% 1,186 (72,020) - - - $20.88

Piestewa Peak corridorA 3 409,394 54,774 13.4% 5,000 1.2% 59,774 14.6% 10.8% 7,978 (15,519) - - - $20.87 B 46 2,200,312 544,898 24.8% 4,797 0.2% 549,695 25.0% 19.8% (90,348) (114,949) - - - $18.07 C 21 325,764 33,742 10.4% - 0.0% 33,742 10.4% 9.3% 589 (3,439) - - - $16.04 total 70 2,935,470 633,414 21.6% 9,797 0.3% 643,211 21.9% 17.3% (81,781) (133,907) - - - $18.19

scottsdale airparkA 50 6,149,857 1,505,615 24.5% 143,827 2.3% 1,649,442 26.8% 30.1% 43,541 199,930 - - - $23.54 B 189 5,082,956 966,764 19.0% 6,149 0.1% 972,913 19.1% 20.9% 59,864 87,700 - - - $19.58 C 14 231,238 43,221 18.7% - 0.0% 43,221 18.7% 32.4% 11,395 31,753 - - - $13.94 total 253 11,464,051 2,515,600 21.9% 149,976 1.3% 2,665,576 23.3% 26.0% 114,800 319,383 - - - $21.99

scottsdale centralA 22 2,313,858 554,965 24.0% 14,513 0.6% 569,478 24.6% 30.6% 43,572 138,658 - - - $23.59 B 140 5,102,463 1,081,048 21.2% 12,798 0.3% 1,093,846 21.4% 22.1% (3,312) 33,621 - - - $20.86 C 11 142,093 7,575 5.3% - 0.0% 7,575 5.3% 4.3% (388) (1,415) - - - $17.12 total 173 7,558,414 1,643,588 21.7% 27,311 0.4% 1,670,899 22.1% 24.4% 39,872 170,864 - - - $21.78

scottsdale southA 11 1,621,103 283,322 17.4% 23,476 1.4% 305,798 18.9% 21.8% 46,771 47,229 - - - $21.69 B 80 2,973,927 700,714 21.1% 11,369 0.4% 639,982 21.5% 23.7% 75,821 64,315 - - - $19.96 C 40 814,114 108,048 13.3% - 0.0% 108,048 13.3% 18.9% 15,914 45,496 - - - $17.39 total 131 5,409,144 1,092,084 18.8% 34,845 0.6% 1,053,828 19.5% 22.4% 138,506 157,040 - - - $20.25

south tempe/ahwatukeeA 4 481,819 74,786 15.5% - 0.0% 74,786 15.5% 19.4% 10,369 18,498 - - - $23.59 B 97 3,878,043 1,127,382 29.1% - 0.0% 1,127,382 29.1% 23.3% 36,459 (222,879) - - - $19.57 C 11 397,824 38,219 9.6% - 0.0% 38,219 9.6% 16.4% - 27,037 - - - $16.86 total 112 4,757,686 1,240,387 26.1% - 0.0% 1,240,387 26.1% 22.3% 46,828 (177,344) - - - $19.82

southwest PhoenixA 1 140,489 93,848 66.8% - 0.0% 93,848 66.8% 66.8% - - - - - $27.50 B 19 589,942 103,235 17.5% - 0.0% 103,235 17.5% 7.1% - (61,105) - - - $13.73 C 12 207,647 52,798 25.4% - 0.0% 52,798 25.4% 22.6% - (5,944) - - - $14.37 total 32 938,078 249,881 26.6% - 0.0% 249,881 26.6% 19.5% - (67,049) - - - $19.05

superstition corridorA 5 671,991 296,310 44.1% - 0.0% 296,310 44.1% 39.0% (32,215) (34,022) - - - $20.70 B 117 3,568,453 697,279 19.5% - 0.0% 697,279 19.5% 22.0% 17,447 88,555 - - - $17.66 C 21 359,747 39,916 11.1% - 0.0% 39,916 11.1% 17.1% 7,466 21,421 - - - $12.42 total 143 4,600,191 1,033,505 22.5% - 0.0% 1,033,505 22.5% 24.1% (7,302) 75,954 - - - $18.46

tempeA 11 1,683,511 515,112 30.6% 7,388 0.4% 522,500 31.0% 38.4% 1,331 123,433 - - - $24.95 B 79 2,950,876 497,527 16.9% 17,583 0.6% 515,110 17.5% 17.3% 15,987 (5,653) - - 69,230 $18.63 C 33 641,428 65,904 10.3% - 0.0% 65,904 10.3% 10.1% 3,428 (1,282) - - - $15.63 total 123 5,275,815 1,078,543 20.4% 24,971 0.5% 1,103,514 20.9% 23.1% 20,746 116,498 - - 69,230 $21.03

West i-10A 0 - - 0.0% - 0.0% - 0.0% 0.0% - - - - - - B 42 1,238,211 221,975 17.9% 2,100 0.2% 224,075 18.1% 18.2% (4,544) 33,403 - - - $23.26 C 8 209,043 7,099 3.4% - 0.0% 7,099 3.4% 1.0% (1,117) (4,977) - - - $16.19 total 50 1,447,254 229,074 15.8% 2,100 0.2% 231,174 16.0% 15.6% (5,661) 28,426 - - - $23.04

grand tOtalA 244 39,956,822 8,770,876 22.0% 783,522 2.0% 9,554,398 23.9% 25.3% 96,062 892,302 0 439,070 0 $23.37 B 1,873 76,888,579 16,695,211 21.7% 319,402 0.4% 17,014,613 22.1% 21.3% 54,459 (382,937) 0 183,000 350,682 $19.47 C 584 12,136,837 1,981,129 16.3% 9,332 0.1% 1,990,461 16.4% 17.2% 112,230 104,646 0 0 0 $13.79 total 2,701 128,982,238 27,447,216 21.3% 1,112,256 0.9% 28,559,472 22.1% 22.1% 262,751 614,011 - 622,070 350,682 $20.48

quarterly tOtals2011 4q 2,701 128,982,238 27,447,216 21.3% 1,112,256 0.9% 28,559,472 22.1% - 262,751 614,011 - 622,070 350,682 $20.48 2011 3q 2,704 129,238,984 27,641,623 21.4% 1,126,245 0.9% 28,767,868 22.3% - 709,367 - 273,780 - 388,327 $20.74 2011 2q 2,702 128,925,204 28,233,167 21.9% 930,288 0.7% 29,163,455 22.6% - 20,545 - 165,290 - 609,712 $20.95 2011 1q 2,701 128,759,914 27,818,006 21.6% 1,200,704 0.9% 29,018,710 22.5% - (373,670) - 183,000 - 689,272 $21.00 2010 4q 2,700 128,576,914 27,293,603 21.2% 1,168,437 0.9% 28,462,040 22.1% - 328,788 - 77,605 1,438,145 872,272 $21.29

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. *Formerly Williams Gateway/loop 202.

Office market

ExiSTinG PRoPERTiES diRECT VACAnCy SUBlEASE VACAnCy ToTAl VACAnCy nET ABSoRPTion - SF nEW SUPPly - SF UndER AVG. REnT

ClASS BldGS. ToTAl SF RATE SF RATE SF Q4-11 Q4-10 CURREnT yTd CURREnT yTd ConSTR. SF RATE (FS) inVEnToRy SF PERiod PERiod

research & forecast report | Q4 2011 | Office | PhOenix

cOlliers internatiOnal | P. 3

Office sales and lease activity

sale activity

PrOPerty address submarket sale date sale Price size sq. ft.

sale Price sq. ft. class

2929 E Camelback Rd., Phoenix Camelback Corridor 11/17 $7,500,000 75,368 $100 B

10439 S 51st St., Phoenix South Tempe/Ahwatukee 11/15 $3,750,000 47,836 $78 B

absorption in Class A space typically accounted for roughly half of the market total.

Asking rents continued to creep lower in the fourth quarter, dropping 1.3 percent to $20.48 per square foot. After declining 7 percent in 2010, asking rents retreated 3.8 percent during the past 12 months with rents in all property classes contracting.

While transaction activity was fairly steady during the first three quarters of 2011, velocity slowed during the fourth quarter. Even after accounting for a slowdown in the last three months, transaction activity in 2011 outpaced 2010 levels by approximately 25 percent, as the uncertainty that prevailed in the market is lessening. The median price in deals closed in 2011 was $82 per square foot, nearly identical to the 2010 median. Cap rates also remained similar to year-

earlier levels, averaging in the mid-8 percent range in deals closed during the past 12 months.

in tHe mOntHs aHeadWhile 2011 was a year where the office market largely stabilized, 2012 will be a period of strengthening office fundamentals. The primary driver of improvement will be the local labor market, which should expand more rapidly in the coming quarters. While the Phoenix area recorded some of the strongest employment growth in the country in 2011, the primary office-using sectors of the local economy actually continued to contract during the year, ending 2011 at levels comparable to 2003-2004. This trend is forecast to reverse course in 2012 and the addition of employees will support net absorption of office space, although space demand and hiring will not move in lockstep, due to tenants backfilling empty cubicles as they add the first waves of new workers.

cOlliers internatiOnal

PhoEnix2390 E. Camelback RoadSuite 100Phoenix, AZ 85016

tel: 602 222 5000fax: 602 222 5001

SCoTTSdAlE14080 n. northsight Blvd.Scottsdale, AZ 85260

tel: 480 596 9000fax: 480 948 0502

bob mulhern Managing director | Greater Phoenixbob.mulhern@colliers.com

Jim keeley Founding Partner | Scottsdalejim.keeley@colliers.com

Pete O’neil Senior Research Analyst | Greater Phoenixpete.oneil@colliers.com

480 offices in 61 countries on 6 continentsUnited States: 135Canada: 39latin America: 17Asia Pacific: 194EMEA: 95

• $1.6 billion in annual revenue

• 672.9 million square feet under management

• Over 10,000 professionals

Copyright © 2011 Colliers international.

The information contained herein has been obtainedfrom sources deemed reliable. While every reasonableeffort has been made to ensure its accuracy, we cannotguarantee it. no responsibility is assumed for anyinaccuracies. Readers are encouraged to consult theirprofessional advisors prior to acting on any of thematerial contained in this report.

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METROPOLITAN PHOENIX OFFICE SUBMARKETS

Miles

10 2 3 4 5

1. 44th St Corridor 2. Airport Area 3. Arrowhead 4. Camelback Corridor 5. Central Scottsdale 6. Chandler 7. Deer Valley/Airport 8. Downtown North 9. Downtown South10. Glendale11. Loop 303/Surprise12. Mesa Downtown13. Mesa East14. Midtown/Central Phoenix17. Northwest Phoenix18. Paradise Valley19. Piestewa Peak Corridor21. Scottsdale Airpark22. Scottsdale South23. South Tempe/Ahwatukee25. Southwest Phoenix26. Superstition Corridor27. Tempe28. West I-1029. Williams Gateway/Loop 202

lease activitybuilding name/address submarket lease tyPe tenant size sq. ft. class

River Corporate Center/ 8075 S River Pky South Tempe/Ahwatukee Move in US Foods 132,224 B

Squaw Peak Corporate Center/ 7740 n 16th St Piestewa Peak Corridor Move in Kimley-horn and

Associates 37,490 A

1030 n Colorado St Chandler Move in Acquinity interactive 22,186 C

research & forecast report | Q4 2011 | Office | PhOenix