The Metro Phoenix Office market continued its trend of positive net absorption this quarter in a BIG way. Fresh off a year of posting 2.8 million SF of net absorption (job growth) in all of 2018, Metro Phoenix hit 1.1 million SF in just the first quarter 2019, sending vacancy down to 16.9% from 17.57%. If this, or something close to this, rate of absorption continues for the rest of the year, tenant demand will substantially outpace the 2.2 million SF of new building supply delivering this year.
Aside from one major lease over 150,000 SF (Voya Financial), the transactions in the first quarter underscored steady, medium-sized growth in the Valley. We love this consistent growth. Many businesses expanded operations here while several groups continued to plant their first flag in the region. Greater Phoenix clearly holds an unfair advantage over other metropolitan markets with its quality of life, quality of workforce and it doesn’t hurt to have the nation’s most innovative university, Arizona State University (ASU), in our backyard.
Similar previous trends continued over the past three months including Tempe (home to ASU) remaining the hottest submarket with high demand and single-digit vacancy. All other areas south and east of Sky Harbor airport captured the most leasing activity.
Below is a link to our Lee & Associates Arizona First Quarter Office Report and as usual, I’ve included my top 3 takeaways:
- New Product Leases– Digging deep into the 1.1 million SF of net absorption in the first quarter, 889,000 SF of it took place in buildings constructed in 2010 or later. This means 80% of employers want the buildings being built this cycle.
- Camelback Corridor turns the Corner– After a negative absorption of 110,000 SF in 2018, The Camelback Corridor posted 155,000 SF of positive net absorption in Q1 2019. By the way, this submarket holds the highest average lease rates across all classes at $35.56/SF.
- WeWork Continues to Make a Splash– WeWork signed the 2nd biggest lease in Q1 at 68,968 SF, three months after it signed 54,000 SF in another submarket. Time will tell how well the co-working giant competes with traditional landlords in this market.
Want to talk more about these trends or how I can help you with your office space? Give me a call.
For those who have followed my narrative for a while now, you might recall that WeWork and the overall rise of Coworking office space has been on my radar for the past few years (Click here to read “Rise of Collaborative Workspace” and here to read “WeWork now a $5 billion co-working startup”).
The market is always shifting. Building owners are adjusting to what many see as a long-term trend in office space that is here to stay. But is it?
Here are some of my key takeaways:
- Common area amenities such as Tenant Lounges, Conference Rooms, Gyms and Cafés/Food trucks no longer just get you the tour, they are mandatory.
- The more urban the building the “cooler” the building has to be to compete.
- Co-working space in a building is seen as an advantage by less traditional tenants (Start-ups & tech companies).
- Technology and Flexibility are here to stay — adapt or die.
If you want to talk about the Coworking trend and what you or your company is doing, shoot me an e-mail.
CRE Trends, Economics and More
A Wide-Ranging Conversation
By Trey Barrineau
Excerpt from Development Magazine ‘CRE Trends, Economics and More’
Despite the rise in work-from-home options, Harris said statistics show that demand for office space continues to grow.
“Office-using employment has grown at times at almost double the rate of the general employment growth rate factor,” said Harris. “And yet office absorption just undershoots what it should. I think companies are still very hesitant to expand and spend more money for space, but they’re hiring people. I would say historically something has to give. You can’t expect people to work in a Starbucks-like environment for so long. There’s got to be a pain point.”
The downside to the equation is that a recession could leave coworking companies like WeWork “pretty exposed,” said Harris.
“WeWork is basically a services-based hotel model,” he said. “WeWork is about flexibility. When you’re locked into a 10-year lease in a traditional office space, it’s hard for a business to plan. The flexibility you get with WeWork is extremely valuable.”
Harris said it is important for companies to have slack space in order to hire more people.
In response, Foster noted that the NAIOP Research Foundation recently published a paper, “Activating Office Building Common Spaces for Competitive Advantage,” that looked at co-working in office buildings. It showed that owners of offices like having a co-working center in their building because it serves as the flex space, so as tenants expand and contract, they can do so in that building.
Stapp wondered if what’s happening with WeWork is challenging how the commercial real estate industry deals with built space.
He noted that use of space has typically been tied to a specific place, for a specific period of time, with the space commitment sealed by a lease. He suggested that if a landlord owns 20,000 apartment units, his objective is to keep cashflow in his portfolio. The user, on the other hand, wants extreme mobility. Rather than having a lease for a defined space over a defined period of time, why not operate a portfolio that’s available to everybody? Through the use of technology, if a tenant wants to move, he or she can pick a new unit that’s available somewhere in the portfolio.
“It’s a total rethinking about how we generate revenue, how we keep people in space, how we use space, and the extreme mobility that it provides,” Stapp said.
Harris said WeWork is providing “space as a service” to businesses, a concept seconded by Stapp.
Activating Office Building Common Spaces for Competitive Advantage
Click here to read the full article.