Phoenix Office Deal Volume Is Up, Construction Still Slow

As last year wound down, construction activity in Phoenix slowed, while office investment picked up since the beginning of the year, pushing the city toward the highest-ranking markets across gateway metros, according to CommercialEdge data.

As of November, Phoenix had 1 million square feet of office space under construction across 19 properties, representing 0.6 percent of the existing inventory, below the national average of 1.7 percent. The metro’s pipeline trailed Charlotte, N.C., and Houston, both with 2.8 million square feet underway, Nashville, Tenn., (3 million square feet) and Atlanta (3.2 million square feet). San Diego (5.2 million square feet) and Austin, Texas, (5 million square feet) were other high-volume secondary markets that still had large office pipelines.

Recent office deliveries

In terms of delivered space, Phoenix had 506,890 square feet of completed office space spread across eight properties in the year’s first 11 months, while construction starts amounted to 634,430 square feet across 12 properties. One of Greater Phoenix’s significant office deliveries was Nationwide Realty Investors’ 150,000-square-foot office building within Cavasson, a mixed-use campus in Scottsdale, Ariz. The project broke ground in 2022 and was completed at the beginning of October.

Another significant delivery included Rio Yards at Novus Innovation Corridor’s Building A, a 148,356-square-foot office property in Tempe, Ariz. Completed in August by developer Wentworth Property Co., the building is part of a 448,356-square-foot office campus.

Meanwhile, a notable groundbreaking was Building 3, Carvana’s 132,014-square-foot Class A development in Tempe. The project is part of the firm’s office complex and has a completion date set in May 2024. At full build-out, the car retailer’s campus would total nearly 785,000 square feet, with some 300,000 square feet pertaining to office space.

Phoenix among the nation’s leaders in office investment

Year-to-date through November, 5.9 million square feet of office space changed hands in Phoenix for a total of $948 million. Compared to other gateway metros, Phoenix came in second to The Bay Area ($1.06 billion) and surpassed Austin ($496 million), San Diego ($495 million), Atlanta ($480 million), Houston ($413 million) and Raleigh-Durham, N.C. ($244 million).

Investments in The Valley seemed to pick up since the start of the third quarter, when CommercialEdge data showed 3.6 million square feet of space changing hands for $587 million. In the January-July interval, the average sale price was $213 per square foot.

In the year’s last quarter through November, some 883,193 square feet of space across nine properties traded in the metro for a combined $124 million. The highest-performing quarter for investments was the third one, when 2.3 million square feet of space changed hands for $335 million.

Phoenix office properties traded at an average price of $183.5 per square foot, year-to-date through November, below the national figure of $192.8. When compared with other gateway markets, Phoenix was pricier than Dallas ($165.1 per square foot), Atlanta ($157.1 per square foot), Charlotte ($144.7 per square foot) and Houston ($127.3 per square foot), but below San Diego ($402.3 per square foot) and The Bay Area ($331.4 per square foot).

One of the priciest office deals in the metro remains Virtus Real Estate Capital’s $48.5 million acquisition of Banner Health Center Plus at The Grove, a 70,000-square-foot medical office building in Phoenix. The property is part of The Grove, RED Development‘s $400 million mixed-use project encompassing more than 750,000 square feet.

Phoenix was one of the top 20 U.S. metros by active office loan volumes, with more than $14.9 billion as of October 2023. CommercialEdge recently did a deep dive into the office sector’s total exposure to credit amid rising headwinds.

Office leasing on a downward trajectory

Office vacancy in Phoenix clocked in at 19.2 percent as of November, with the national vacancy rate set at 18.2 percent. Vacancy has increased in the metro since the beginning of the year, starting at 17.0 percent in January, and continuing with 18.8 percent in June. Among similar markets, Phoenix lagged Charlotte (15.7 percent), Atlanta (17.4 percent) and Dallas (18.9 percent), but surpassed The Bay Area (20.3 percent) and Austin (21.2 percent).

One of the largest office deals was Vanguard Group’s 133,634-square-foot expansion at Northsight Corporate Center, in the Scottsdale Airport submarket. CIM Group has been the owner of the 141,534-square-foot office building since 2019.

The metro’s largest office lease of last year was signed in December: Peckham Inc. committed to 136,194 square feet, fully occupying One Compass Center, a Class A office building in the South Phoenix submarket. Cushman & Wakefield negotiated on behalf of the landlord, Menlo Equities.

Future flex office hotspot?

As of November, Phoenix had 1.3 million square feet of shared office space, more than Austin and San Diego, each having 1.1 million square feet. Across other gateway markets, The Valley was surpassed by Dallas (2.4 million square feet), Atlanta (2.1 million square feet) and Houston (1.9 million square feet).

The metro’s share of coworking space as percentage of total leasable office space reached 1.6 percent in November, surpassing Charlotte (1.3 percent), while being outpaced by Raleigh-Durham and Nashville (2.7 percent) and Atlanta (2.1 percent), as well as by Dallas, Houston and Austin, with their numbers on par with the national average of 1.7 percent.

Year-to-date through November, flex office provider Cubework had the largest footprint of total leasable office space, with Phoenix locations totaling 1,944,745 square feet. The company was followed by Regus, with 466,097 square feet, and WeWork, with 239,316 square feet.

Recent new coworking spaces in the metro include Industrious‘ new 27,263-square-foot location in Scottsdale, Ariz. The new space will be located at Kierland Commons, a 466,700-square-foot mixed-use building owned by Macerich. The deal marked the flex office provider’s sixth location in Arizona, and its third one in Scottsdale.

In July, Lucid Private Offices signed a 26,910-square-foot lease at 24th at Camelback II, a 306,877-square-foot office building owned by Hines and Invesco Real Estate. The deal marks the Texas-based tenant’s first coworking location in the state.