The Phoenix office market closed 2017 with a strong quarter. Substantial activity in the tech and healthcare industries coupled with improving economic fundamentals drove demand for office space.
The Phoenix office market’s net absorption totaled 1,020,484 sq. ft. during Q4 2017, marking the fourth-highest level of quarterly net absorption in the past decade. This brought year-to-date net absorption to 2.8 million sq. ft.
The overall vacancy rate for metropolitan Phoenix ended Q4 2017 at 16.4%. This is 40 basis points (bps) lower than the previous quarter and a 100-bps decrease year-over-year.
The fourth quarter marked the 30th consecutive quarter of positive net absorption.
Vacancy continued to trend downward, especially in the most popular submarkets (Tempe and South Scottsdale).
The average asking lease rate for the Phoenix office market was $25.49 per sq. ft. full service gross (FSG-annual) at the end of Q4 2017, representing a 4.9% annual increase. At quarter-end, the Class A average asking rate was $34.30 per sq. ft. Over the same period, the Class B and Class C average asking rate was $25.17 per sq. ft. and $18.65 per sq. ft., respectively.
At the end of Q4 2017, approximately 1.8 million sq. ft. of office space was under construction— 44% of which is pre-leased. Though developers remain focused on BTS, the outlook for speculative projects is positive due to the scarcity of large blocks of Class A space in the market.