1st Quarter 2019 | 1

Real Estate Market Review

Phoenix Office

1st Quarter

2019

The Phoenix office market started the year off with continued signs of a tightened market, as asking rents reach a new post-recession record high, and vacancy and availability rates remain stagnant at the record low from year end 2018. Leasing activity slowed down a bit this quarter from the historical average in transaction volume, but in contract, the office sales volume experienced one of the highest number of properties traded in a first quarter, almost doubling the volume from this time last year. With such solid fundamentals, Phoenix remains a liquid market for office investors and users alike, as strong growth in office-using employment continues to drive the demand for office space. Overall employment growth remains positive, as the Phoenix unemployment rate fell 50 basis points from last month to 4.3%, now 600 basis points lower than the peak high of 10.3% in November 2009. Typically, economists consider an economy to be at “full employment” when the unemployment rate reaches five percent, but the Phoenix market has been experiencing sub-five percent unemployment since November of 2015.

The first quarter office vacancy level holds still from year

end 2018 at 13.2%, the lowest vacancy recorded since

the fourth quarter in 2007. In other words, vacancies

haven’t been this low since prior to the Great Recession.

Submarkets in Phoenix with the highest vacancy rates

include Midtown in the Central Corridor at 19.8%,

North I-17 at 18.4% and Northwest Phoenix at 24.3%,

both situated in Northwest Phoenix. Submarkets with

Continued, page 4

Market Forecast Trends

YEAR-TO-YEAR BASIS

ABSORPTION

RENTAL RATE

CONSTRUCTION DELIVERIES

VACANCY

Voya Financial 1700 S Price Rd 151,359 s.f.

WeWork 410 N Scottsdale Rd 68,968 s.f.

Caris Life Sciences 350 W Washington St 38,640 s.f.

Notable Lease TransactionsAscent Real Estate Advisors

1655 W Alameda Dr, Tempe

236,188 s.f. | $71.5M or $303/s.f.

Ryan Companies US, Inc. & Balfour Pacific

3003 N Central Ave, Phoenix

457,893 s.f. | $42.3M or $93/s.f.

Anchor Health Properties

14642 – 14820 N Del Webb Blvd, Sun City

106,503 s.f. | $25.3M or $237/s.f.

Notable Sale Transactions

2 | Phoenix Office Real Estate Market Review

Market Breakdown

1Q19 4Q18 1Q18 Annual % Change

Direct Vacancy Rate 13.2% 13.2% 14.5% -8.97%

Availability Rate 16.2% 16.2% 16.7% -2.99%

Asking Lease Rate $25.56 $25.32 $24.84 2.90%

Leased SF 1,806,530 2,324,780 2,336,089 -22.67%

Sold SF 3,191,344 4,081,787 1,702,655 87.43%

Net Absorption 501,253 89,023 963,905 N/A

Phoenix Office Charts

VACANCY, AVAILABILITY & LEASE RATE AVERAGE SALES PRICE & CAPITALIZATION RATES

NET ABSORPTION & NEW DELIVERIES SALES VOLUME VS. LEASE VOLUME

Direct Vacancy Total Available Direct Lease Rate (PSF)

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD$0

$5

$10

$15

$20

$25

$30

12%

14%

16%

18%

20%

22%

24%

Average Sales Price (PSF) Cap Rate

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD$100

$150

$200

$250

4%

6%

8%

10%

Net Absorption (SF) New Deliveries (SF)

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD

-2M

-1.5M

-1M

-500K

0

500K

1M

1.5M

2M

2.5M

3M

3.5M

4.0M

Sales Volume (SF) Lease Volume (SF)

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD

0M

3M

6M

9M

12M

15M

1st Quarter 2019 | 3kiddermathews.com

Submarket Statistics

SubmarketTotal

Inventory

Direct Vacancy

Rate

Total Vacancy

Rate

Total Available

Rate

1Q19 Direct Net Absorption

2018 Direct Net Absorption

SF Under Construction

1Q19 Leasing Activity

2018 Leasing Activity

Avg Rental Rate

Airport Area 9,322,359 14.1% 16.0% 19.6% 218,130 635,695 0 54,850 933,400 $23.76

South Tempe / Ahwatukee 7,093,306 10.7% 11.3% 14.6% 299,800 293,009 0 68,121 422,138 $24.00

Airport 16,415,665 12.6% 13.9% 17.4% 517,930 769,818 0 122,971 1,355,538 $23.88

Downtown 10,048,759 11.4% 12.3% 15.0% -120,366 148,973 228,402 76,125 308,755 $30.84

Midtown 12,059,716 19.6% 19.8% 21.9% -56,092 173,271 0 99,243 469,112 $23.52

Central Corridor 22,108,475 15.8% 16.4% 18.7% -176,458 322,244 228,402 175,368 777,867 $25.92

44th Street Corridor 3,786,930 11.4% 11.5% 14.4% -150 74,123 0 22,265 232,077 $26.52

Camelback Corridor 9,148,002 15.9% 16.7% 20.9% 51,782 -148,998 0 108,214 597,374 $31.68

Midtown / Central Phoenix 4,881,995 8.4% 8.5% 11.6% -26,134 151,365 0 22,401 175,232 $20.76

East Phoenix 17,816,927 12.9% 13.4% 17.0% 25,498 76,490 0 152,880 1,004,683 $28.80

Chandler 9,765,020 13.7% 13.9% 15.7% 240,843 548,782 748,721 97,609 728,937 $26.40

Gateway Airport / Loop 202 1,372,180 8.4% 11.8% 14.7% -7,732 56,122 185,600 14,469 83,844 $25.20

Mesa Downtown 924,621 6.4% 6.4% 9.3% -24,322 7,988 0 3,289 9,875 $19.44

Mesa East 2,029,877 7.4% 7.4% 7.5% -44,106 45,380 0 3,883 44,700 $18.24

Superstition Corridor 4,771,638 9.3% 9.7% 12.7% 16,761 20,471 0 99,154 312,694 $21.36

Tempe 14,724,422 6.3% 6.3% 9.3% 379,112 546,248 961,628 144,435 502,911 $27.00

East Valley 33,587,758 9.0% 9.3% 11.8% 560,556 1,224,991 1,895,949 362,839 1,682,961 $25.44

N Phoenix / Cave Creek 81,281 0.0% 3.7% 5.9% 2,400 5,906 0 2,400 4,626 $19.32

Paradise Valley 3,738,342 13.0% 13.4% 15.2% 4,740 31,285 0 62,604 285,171 $25.20

Piestewa Peak Corridor 3,119,582 15.9% 16.9% 19.2% 5,610 -31,740 0 24,805 112,858 $23.76

North Phoenix 6,939,205 14.1% 14.9% 16.9% 12,750 5,451 0 89,809 402,655 $24.48

Arrowhead 2,950,899 14.5% 14.9% 14.7% -28,431 76,445 25,401 66,804 215,135 $26.04

Deer Valley / Airport 11,161,287 10.7% 10.9% 17.0% -22,528 455,356 14,500 75,292 643,954 $24.48

North I-17 510,640 18.4% 18.4% 23.9% 6,997 60 23,000 8,537 6,171 $25.20

Northwest Phoenix 8,710,734 23.5% 24.3% 28.2% -156,358 -41,581 0 81,435 511,728 $19.20

Northwest Phoenix 23,333,560 16.2% 16.5% 21.1% -200,320 480,132 62,901 232,068 1,376,988 $21.84

Pinal County 816,637 8.7% 8.7% 8.9% -2,869 -860 0 2,000 5,260 $19.44

Central Scottsdale 7,641,437 11.8% 12.6% 16.4% -10,976 -31,149 0 105,132 541,320 $26.76

N Scottsdale / Carefree 1,080,339 17.1% 17.1% 21.3% -1,979 -10,676 0 2,941 40,200 $23.88

Scottsdale Airpark 12,473,213 11.8% 13.4% 17.1% -246,662 45,064 48,514 208,946 717,264 $29.40

Scottsdale South 5,684,657 12.4% 13.5% 15.8% 1,212 58,633 274,338 131,244 517,119 $31.08

Scottsdale 26,879,646 12.1% 13.3% 16.8% -258,405 61,872 322,852 448,263 1,815,903 $28.80

Glendale 2,823,378 12.8% 13.7% 14.3% 9,623 108,238 68,000 350 57,201 $26.16

Loop 303 / Surprise 1,929,109 8.3% 8.6% 9.7% 981 47,021 0 3,830 34,469 $24.48

Southwest Phoenix 4,346,420 5.7% 5.7% 6.0% 16,844 224,754 0 0 31,622 $27.36

West I-10 2,072,310 12.0% 12.3% 13.1% -4,877 46,675 0 25,196 34,445 $24.96

West Phoenix 11,171,217 9.1% 9.4% 10.1% 22,571 426,688 68,000 29,376 157,737 $25.92

Phoenix Total 159,069,090 12.6% 13.2% 16.2% 501,253 3,379,620 2,578,104 1,615,574 8,592,386 $25.56

Class A 52,963,786 12.4% 13.3% 16.4% 464,175 1,365,018 2,010,490 688,454 3,474,737 $30.72

Class B 90,682,982 13.7% 14.3% 17.5% 21,666 1,308,537 567,614 837,025 4,729,086 $23.52

Class C 15,676,422 6.5% 6.7% 7.5% 15,412 706,065 0 90,095 388,563 $18.60

4 | Phoenix Office Real Estate Market Review

the least vacant space include Cave Creek at 3.7%,

Southwest Phoenix at 5.7%, and Mesa East at 7.5%. With

approximately 501,000 square feet absorbed at the end

of Q1 2019, the individual submarket with the greatest net

direct absorption was South Tempe with almost 300,000

square feet of positive absorption. A factor contributing to

the recent vacancy compression and robust rent growth

has been a relative lack of new supply in the development

pipeline. Roughly 950,000 square feet of new construction

was already delivered in the first quarter, a healthy number

in volume when compared to the historical average.

Another 2.6 million square feet of office product is currently

under construction, most of the projects due to deliver by

year’s end. Of the 2.6 million square feet, Class A product

makes up the bulk of the development with 2 million

square feet.

Direct asking rental rates market wide for office properties

increased for the 25th consecutive quarter, to $25.56 per

square foot on a full-service basis, a record breaking rate

since post-recession. Class A space in the first quarter

climbed to $29.88, while Class B rates peaked at $23.64.

Direct asking rates in the Camelback Corridor were the

highest, averaging $31.68 per square foot. By contrast,

the Mesa East submarket had the lowest rates, reporting

an average asking rent of $18.24 per square foot. The

Phoenix office market’s steady vacancy compression has

translated into some of the healthiest rent gains in the

country in the past several years. Despite the upward trend

in rent increases, Phoenix offers a sizable discount on

office space on a national scale. The relative affordability of

Phoenix could continue to attract tenants looking to set up

or expand operations in the western part of the US without

paying the premium rents in coastal markets.

Strong growth in office-using employment, steady

increasing rent trends and a rising local economy have

played a large part for institutional investors to gain

confidence in the Phoenix office market. Transaction

volume almost doubled year-over-year with approximately

3.1 million square foot sold in the first quarter. The average

sale price for Phoenix office assets was $154.57 per square

foot, a hairline higher than this time last year at $154.08.

Source: CoStar, The Cleveland Fed, and BLS

Kidder Mathews is the largest, independent commercial real estate firm on the West Coast, with more than 750 real estate professionals and staff in 21 offices in Washington, Oregon, California, Nevada, and Arizona. We offer a complete range of brokerage, appraisal, property management, consulting, project and construction management, and debt equity finance services for all property types.

ASSIGNMENTS ANNUALLY

TOTAL # APPRAISERS/MAI’S

MANAGEMENT PORTFOLIO

51M+ 1,600+

PROPERTY MANAGEMENT VALUATION ADVISORY

36/23

ANNUAL TRANSACTION

VOLUME

$9B

ANNUAL LEASING SF

40M

ANNUAL SALES SF

20M

COMMERCIAL BROKERAGE

# BROKERS

380+

Contact

The information in this report was composed by the Kidder Mathews Research Group.

Jerry Holdner

Director of Research 949.557.5050 jholdner@kiddermathews.com

Mark Read

Regional President, Brokerage Southwest 858.509.1200 mread@kiddermathews.com LIC #00572743

kiddermathews.com

This information supplied herein is from sources we deem reliable. It is provided without any representation, warranty or guarantee, expressed or implied as to its accuracy. Prospective Buyer or Tenant should conduct an independent investigation and verification of all matters deemed to be material, including, but not limited to, statements of income and expenses. CONSULT YOUR ATTORNEY, ACCOUNTANT, OR OTHER PROFESSIONAL ADVISOR.