Phoenix Office Market Feels Effect of National Economy and Posts Negative Net Absorption for 2008
7 Jan, 2009, Phoenix, AZ
The Metro Phoenix office market posted negative direct net absorption for the first time since 2001 as the city was impacted by the effects of a national economic downturn, according to statistics released today by Cushman & Wakefield of Arizona, Inc.
“This past year, in response to slower national economic conditions, the Phoenix market experienced higher vacancy, lower demand and lower effective lease rates,” says Tom Johnston, senior managing director of Cushman & Wakefield of Arizona, Inc. “Further softening is expected throughout 2009 as more new space is completed and demand flounders.”
The Metro Phoenix office market posted negative direct net absorption of (641,450) square feet during 2008, compared to positive direct net absorption of 1,314,222 square feet for 2007. The Scottsdale and Southeast Valley areas were the only regions to post positive direct net absorption for 2008. The Central Business District (CBD) posted negative direct net absorption of (205,087) square feet, as Midtown lost significant net absorption and counterbalanced a slight positive absorption in Downtown.
“Companies leasing significant space in 2008 were drawn to new buildings and pre-lease opportunities,” says Johnston. “Tenants began a flee to quality, taking advantage of market conditions allowing them to occupy new space at desirable rates. We will see more of that trend in 2009, and tenants will demand more concessions like higher improvement allowances, free parking and relocation reimbursement. Companies will want to avoid out of pocket expenses for any move. The trend will drive up vacancy in Class B buildings as tenants seek good deals in Class A properties. This will likely impact areas such as Midtown and the Camelback Corridor; submarkets with relatively older buildings that were not the focus of our recent construction surge.”
Some of the larger office leases that occurred in 2008 include Pulte Homes’ transaction at Terra Verde to occupy 173,000 square feet. Vangent leased approximately 124,000 square feet in the MetroCenter area and Healthways leased approximately 75,000 square feet at Allred Park Place.
“While these tenants were leasing substantial space in 2008, we must be mindful of downsizings and businesses vacating space as well,” says Johnston. “Preparing for 2009, we anticipate the Internal Revenue Service moving out of the 210 E. Earll Dr. building, which will bring approximately 150,000 square feet back on the market. In addition, we expect DHL to put its Cotton Center space on the sublease market, which will add an estimated 270,000 square feet to the Valley’s availability.”
The direct vacancy rate for office space rose to 18.9 percent at year-end 2008, up more than five percentage points from the 13.8 percent posted at the end of 2007. Overall vacancy of office space, which includes both landlord-controlled and sublease space, rose to 20.7 percent at the end of 2008, up from just 15.0 percent a year ago.
“Vacancies were driven up by a number of factors,” says Johnston. “Many companies consolidated, decreased in size or closed their doors during 2008 just as construction was completed on a variety of new projects that were started during the more active 2006 and 2007 years. The drop in demand and surge in availability sent the marketplace into higher vacancies and a more tenant-driven environment for negotiations.”
During 2008, approximately 4,712,030 square feet of new office space was added to the Valley’s inventory, more than the 4,003,359 square feet added in 2007. The Southeast Valley added the most square footage with 2,027,140, most of which was located in the Chandler/Gilbert submarket.
Currently, approximately 2,712,195 square feet of new office space are under construction. Most, if not all, of that space will be completed in 2009 and will add upward pressure to the Valley’s vacancy rate.
Direct weighted average rental rates have risen slightly from a statistical standpoint. This is attributed to the larger amount of new, Class A space being added to the market and increasing the average building rental rate. Effective rates, however, are decreasing as landlords offer larger concession packages to creditworthy tenants.
“Most of our office market conditions have been created by the national housing problem and the credit crisis,” says Johnston. “It’s difficult for anyone to predict the timing for recovery as the entire country awaits results of a new administration’s economic policy. However, we predict that our office market’s downturn is not completed and optimistically estimate hitting bottom in mid- to late-2009. Our research indicates that 2009 will be similar to 2008 in terms of negative net absorption and increasing vacancies. However, we continue to attract new residents and are poised to recover quickly as the economy turns around.”
Cushman & Wakefield is the world's largest privately held commercial real estate services firm. Founded in 1917, it has 221 offices in 58 countries and more than 15,000 employees. The firm represents a diverse customer base ranging from small businesses to Fortune 500 companies. It offers a complete range of services within four primary disciplines: Transaction Services, including tenant and landlord representation in office, industrial and retail real estate; Capital Markets, including property sales, investment management, valuation services, investment banking, debt and equity financing; Client Solutions, including integrated real estate strategies for large corporations and property owners, and Consulting Services, including business and real estate consulting. A recognized leader in global real estate research, the firm publishes a broad array of proprietary reports available on its online Knowledge Center at www.cushmanwakefield.com.