The second quarter was not quite as busy as the first, but there is still good news as our market slowly (painfully slow) continues to improve. Vacancy held steady at 18.8% despite new construction, and we continued our streak of continuous positive net absorption (job growth). We haven’t had negative net absorption since 2009.
The pace of net absorption slowed by approximately 500,000 SF in the second quarter, which is the amount of space State Farm absorbed in the final phase of its move to Marina Heights, last quarter. We now stand at 1.4 million SF of office space absorbed at the mid-year mark. We will need to absorb another 1.1 million SF in the second half of the year to meet our 25-year average.
At the street level, my team’s transaction volume remains healthy and I anticipate Q3 will be noticeably better than Q2.
Below is the link to our Lee & Associates Arizona 2nd Quarter 2017 Office Report and as usual, here are my top 4 takeaways:
1. Downtown Action – Two of the top five leases occurred at the intersection of Central and Washington. They symbolize a lot of the action and investment going on in our CBD, which helps the entire Metro market look good. Quicken Loans moved from North Scottsdale (the hottest submarket last cycle) into Downtown. Why? The buzz of a vibrant downtown.
2. Sublease Space – There is 1.9 million SF of sublease space across the entire market. Not all of it may be great space or have a significant amount of term left; but it means interesting opportunities for tenants and concern for landlords in certain areas. This is a new cycle trend as we have not seen 2 million feet of sublease in a long time.
3. Lease Rates – Overall across the market, lease rates continue to grow (currently, they average $24.67/SF), but have still have not hit pre-recession levels ($26.55/SF). Note, this is an average because rates have spiked to nearly $40/SF in a few key micro-markets.
4. Recovery – Our recovery has come a long way this cycle, and we’ve done it without relying heavily on real estate related companies, like Metro Phoenix has done since there was an office market. This means our market is increasingly becoming healthier and more diverse. Slower growth but great diversity bodes well for sustained momentum and a smoother ride as the inevitable down cycle comes.
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Click Here to Read the Full Report