Scalable Class A, 384 KSF Office Planned for Tempe Park

By Scott Baltic, Contributing Editor

Metro Commercial Properties of Tempe, Ariz., and USAA Real Estate Co., of San Antonio, Texas, have announced the next phase of high-rise office development at Fountainhead Corporate Park in Tempe. Their plans call for a Class A office tower, dubbed Fountainhead Park Summit, of up to 14 stories and totaling up to 384,300 square feet.

USAA is the owner of the 6-acre site, which fronts onto Maricopa Freeway (I-10), and Metro Commercial Properties is USAA’s contract developer.

The project is expected to cost $240 to $250 per square foot, Metro CFO and principal Tony Hepner told Commercial Property Executive. But a total figure isn’t relevant yet, he emphasized, because the project is scalable, with 14 stories and 384,000 square feet being the entitled maximum for the site.

If a single large user wanted a building of eight stories and about 200,000 square feet, that’s what would be built, Hepner said. The minimum that would be considered at this time, he said, would be four stories and 100,000 square feet. Hepner noted the diminishing availability of Class A office space blocks over 100,000 square feet in the market.

Hepner also indicated that the building won’t go ahead until a lead tenant has been signed. In a softer-than-soft Phoenix-area office market, that only makes sense, and it’s what the same partners were able to do recently in the 65-acre masterplanned park.

Last summer, Metro and USAA completed Fountainhead Office Plaza A&B, 10- and 6-story Class A office buildings totaling 439,000 square feet. The pair of buildings is leased on a long-term triple net lease to the University of Phoenix, which moved in last fall. KBS REIT bought the project in 2011.

Fountainhead Corporate Park has been under way since at least 1985 and currently includes eight Class A office buildings; an onsite conference center; a State Farm campus of five Class A office buildings, comprising the insurer’s West Coast regional headquarters; a 233,000-square-foot, single-story multitenant office building; and a 280-unit residential community. A 15,000-square-foot retail center is planned.

Cushman & Wakefield Inc. has been selected as Metro’s exclusive agent to market and prelease Fountainhead Park Summit and will focus on finding a lead tenant.

Davis Design Solutions L.L.C. provided the architectural designs for the building and the adjacent 8-story, 1,600-space garage.

The decision on whether to solicit full or partial interim construction financing will be made by USAA once a lead tenant has been signed, Hepner said, based on the capital market situation and construction debt pricing at that time. That said, he noted, USAA has ability to self-finance the project, as it did on Fountainhead Office Plaza A&B.

Citing figures from CoStar Group, Walter Winius Jr., managing director at Integra Winius Realty Analysts, Phoenix, told CPE that the overall office vacancy rate in metro Phoenix decreased to 20.7 percent in the first quarter. Fourth-quarter 2011 figures show a 23.5 percent vacancy rate in Class A space. Quoted lease rates for Class A office in Tempe averaged $18.78 in the first quarter, significantly lower than in the Phoenix CBD or other outlying submarkets.

Absorption is kind of perking along, Winius said, but with plenty of inventory and probably an additional 5 percent of the market available for sublease, he doesn’t expect much decrease in the vacancy rate any time soon. The best recent cap rate he has seen was about 8.4 percent.