Greater Phoenix

Greater Phoenix
Office Market Report | Fourth Quarter 2010
Office Market - 4th Quarter 2010
The Phoenix office market is making slow (read, stubborn) progress toward recovery. Its rebound lags
behind most all office markets nationwide, both with vacancy and suppressed rental rates. An abundance
of office space exists at all levels, save for a few small geographic areas. In spite of the overall negative
scenario, the office sector has made impressive gains in absorption. Rental rate declines have slowed their
trajectory and positive employment numbers are beginning to translate in additional space requirements for
tenants.
Leasing activity continues to improve as the fourth quarter showed the most gains in square feet leased for
2010. This is an important indicator that reasonable pricing values are emerging on both sides of the deal.
No longer are most transactions riddled with unheard of rent concessions. Tenants still have an upper hand,
but owners have done their homework as well and sense the recovery is in progress, thereby lessening
the need to give away the store. As building prices remain suppressed, investors are starting to test the
waters again. According to Real Capital Analytics, a more diverse group of investors fueled by improving
credit conditions are bringing cash to the table again. Consequently, sellers, having struggled in the past
few years to see the pricing realties of the market, are coming around, too. Loan workouts are way up and
are expected to soon outpace distressed properties. Distressed, troubled and REO properties have already
come down from their peak. This trend is expected to improve throughout 2011.
Overall office vacancy rate for Class A and B properties dropped slightly from last quarter (based on
adjusted quarterly figures) to 23.2%. This rate is still historically high and should stay above 20 percent
during 2011. Absorption was positive, posting a nearly 682,000 square foot increase this quarter.
Rental rates continue to slide and posted at $21.69 per square foot, down from an adjusted $21.98 last
quarter. Deliveries this quarter were down as well to two East Valley buildings totaling 58,882 square feet.
At this time, there were no spec commercial office buildings being constructed in the Valley. In retrospect, In
fourth quarter 2008, there was nearly 8 million square feet of office buildings under construction.
4Q 2010
Office
Indicators
Vacancy Rate
Net Absorption
Construction
Asking Rents
In the largest office building sale of the quarter, Anchor Centre at 2201-2231 E. Camelback Rd in Phoenix,
sold for $52 million. The Class A, 333,265 square foot buildings commanded a $154.10 price per square
continued on next page
tel 602 955 4000
2944 North 44th Street Suite 200
Phoenix AZ 85018
www.naihorizon.com
foot. In the largest lease transaction of the quarter, CIGNA Corp leased 232,650 square feet of Class A office space at
25500-25600 N. Norterra Pkwy in Phoenix. CIGNA will occupy half the total space in 2011 and the remainder
in 2012.
A renewal in the Phoenix office market is still some time off. Years of betting on never ending growth fueled the overbuilding
and speculation that the sector has been saddled with for the past three years. However, a wide consensus sees 2011
as the year we shake off the shackles of the previous recession and retool for more growth ahead. Success will reach the
office market last among commercial sectors, but that gives the underlying players time to heal and rebuild on a more solid
footing before the stampede resumes.
For more comprehensive market information, please visit with an NAI Advisor.
Economic Outlook
The largest economic downturn in modern U.S. history has been officially over for some time; although, most weren’t
buying it. Slowly, as positive indicators began to take shape, the mood shifted. It became a matter of when the recovery
would come rather than if it would come at all. This year, 2011, will be the turning point for greater opportunities and
investor confidence returning to the marketplace.
Since its peak in 2006-2007, the commercial real estate market has been heading in only one direction: down. Lagging
behind Wall Street and the housing industry collapse, commercial real estate, piled high with rising vacancies and loan
defaults, hit the skids especially hard in the past two years. The Phoenix area’s unique set of issues including a devastated
housing market, contributed to the growing crisis mentality. Phoenix became toxic to investors and companies looking to
expand. The shine was off the apple on what had been a remarkable run of success for the Valley. Many counted Phoenix
out as an example of what could go wrong with a boom and bust economy like ours. At the time, many agreed with that
assessment.
Yet again, as the city’s name implies, it begins a slow rise to reclaim its position.
This month, the U.S. Bureau of Labor Statistics reported on the latest job figures. The Phoenix Metro area ranked fourth
in job creation among the largest U.S. metropolitan areas. This high rank, although historically common for Phoenix,
has been missing over the past few years. It could prove to be a bellwether of things to come. Sales tax revenues are
beginning to rise as consumers begin to spend their tightly held dollars. The Phoenix housing market continues to struggle
and will for some time. An enormous inventory of vacant homes both new and foreclosed, dot the landscape keeping
home values at historic lows. Many experts agree, the housing market will be the last indicator to pull out of the red.
However, low housing prices are attracting companies to relocate to Phoenix bringing employees and new jobs with them.
This year, a unique opportunity exists to build on a more solid foundation with the gift of hindsight to guide ones
participation and success in the coming wave.
Historical Office Vacancy Rate
Historical Office Vacancy Rate
Historical Average Quoted Office Rental Rates
Historical Average Quoted Office Rental Rates
25%
$27.50
23%
$26.00
21%
19%
$24.50
17%
$23.00
15%
13%
$21.50
11%
$20.00
9%
7%
5%
$18.50
4Q06
2Q07
4Q07
2Q08
4Q08
2Q09
4Q09
2Q10
4Q10
$17.00
4Q06
2Q07
4Q07
2Q08
4Q08
2Q09
4Q09
2Q10
4Q10
Phoenix Industrial Market Report | First Quarter 2010
Greater Phoenix
Office Market Report | Fourth Quarter 2010
Includes multi-tenant, single tenant and owner occupied office inventory.
Top Lease Transactions 4Q10
Address 25500-25600 N Norterra Pkwy, Phoenix
4425 E Cotten Center Blvd, Phoenix
2512 W Dunlap Ave, Phoenix
Market Northwest
Sky Harbor
Northwest
Sign Date
11/.01.2010
12.16.2010
12.29.2010
Tenant
CIGNA Corp.
United Healthcare
Cognizant
SF
232,650
165,000
135,114
Class
A
B
A
Top Sales Transactions 4Q10
Address 2201-2231 E Camelback Rd, Phoenix
4722 N 24th St, Phoenix 7878 N 16th St, Phoenix Market Central Phoenix Central Phoenix
Central Phoenix Sale Date
11.12.10
10.08.10
11.19.10
Sales Price
$52,000,000
$27,250,000
$20,750,000
SF
200,576
161,884
76,718
PSF
$154.10
$83.20
$117.42
Some information contained herein has been obtained from third party sources deemed reliable, but it has not been independently verified NAI Horizon. NAI Horizon
makes no warranties or representations as to the completeness or accuracy thereof. NAI Horizon makes no guarantee about projections, opinions, assumptions or
estimates. Occasionally corrected or updated information becomes available for both current and historical data, thereby invalidating specific comparison to previously
issued reports.
NAI Horizon | 2944 N 44th St Suite 200 | Phoenix AZ 85018
602 955 4000 | www.naihorizon.com
Class
A
A
B
NAI Horizon Office Specialists
Andrea Davis, CCIM
Senior Vice President
[email protected]
Peggy Johnson
Vice President
[email protected]
Laurel Lewis
Senior Vice President
[email protected]
Josh Landers
Vice President
[email protected]
George Long
Senior Vice President
[email protected]
Patricia E. Rogers, CCIM
Vice President
[email protected]
Rob Downing
Vice President
[email protected]
Thomas Bean
Senior Associate
[email protected]
Stacie Harrison
Vice President
[email protected]
Leslie Zavos
Associate Broker
[email protected]
NAI Horizon Investment Specialists
Report prepared by:
Bobby Bull
Senior Vice President
[email protected]
Barbara Lloyd
Senior Vice President
[email protected]
Matt DePinto
Research Manager
[email protected]
Barry Lammersen
Senior Vice President
[email protected]
Ed Toschik
Senior Associate
[email protected]