Phoenix-area office market shows life with new projects

Although the metro Phoenix office market continues to struggle, it performed well enough during the first quarter to prompt a handful of office developers to announce plans for new projects, commercial real-estate analysts said.

Overall, the office-leasing market fared better in the first quarter than it had during the same period since 2007, said Chris Jantz, vice president of research at Cassidy Turley BRE Commercial in Phoenix.

It was also the first quarter in years in which a handful of office developers announced new projects, including Hayden Ferry Lakeside III in Tempe and SkySong III in Scottsdale.

Jantz said the Phoenix area's overall office-vacancy rate is still uncomfortably high at 28.2 percent for privately owned, multi-tenant office properties of at least 20,000 square feet.

That's down just a hair from the 28.3 percent vacancy rate reported for the same properties in the first quarter of 2011, he said.

The biggest difference was that overall net absorption -- the total amount of previously vacant space that became occupied by tenants -- was a positive number in the first quarter for the first time in five years, Jantz said.

Still, the total net absorption was only about 91,000 square feet, a relatively small amount compared with the local office market's total vacant space of about 19.2 million square feet.

"Things are certainly improving, but we'll need to see a lot more activity for the vacancy rate to go down significantly," Jantz said.

Commercial-real-estate brokers and analysts generally break down office properties into three categories based on location, age and quality. The categories are, from best to worst, Class A, Class B and Class C.

A Cassidy Turley report issued this week showed that Class A properties had positive absorption of about 132,000 square feet in the first quarter, while Class B properties had negative absorption of nearly 37,000 square feet.

That means Class B properties actually lost tenants overall in the first quarter. Class C office properties also lost overall, about 4,300 square feet.

Jantz said those numbers are further evidence of a trend that has been occurring for the past few years, in which office tenants move from lower-quality properties to nicer and newer ones because prices are so low.

Brokers call it the "flight to quality," he said.

The average asking rent for office properties of all classes was down in the first quarter compared with a year earlier, according to the report.

In the first quarter, the average asking rent was $20.84 per square foot annually, compared with $21.62 per square foot annually in the first quarter of 2011.

Jantz said asking rents are expected to remain flat throughout 2012.

by J. Craig Anderson - Apr. 4, 2012 06:35 PM The Republic | azcentral.com



Phoenix-area office market shows life with new projects