H1 Office Deal Volume High in Phoenix

Phoenix office construction continued on a slow note in the first half of 2024, with developers commencing new office projects only across nine properties, according to CommercialEdge data. Even if pipeline fundamentals were low, Phoenix maintained its position as one of the nation’s leaders in terms of office investment, its sales volume placing it among the top three best-performing metros in the Sun Belt region and among the top five on a national level.

In June, Phoenix had 689,611 square feet of office space under construction across 13 properties, representing 0.4 percent of the existing inventory—below the national average of 1.4 percent. Following last year’s drop in construction activity, the metro’s pipeline remained the smallest across Sun Belt metros, with Dallas leading with 6.5 million square feet, followed by Austin (4.6 million square feet) and San Diego (3.8 million square feet).

Phoenix office construction activity still slow

Significant office development projects in Phoenix include Gilbert Spectrum’s Building 3, a 119,222-square-foot Class A building expected to come online by the end of August. The project is part of SunCap Property Group’s expansion plan of Gilbert Spectrum campus, a development that will include 850,000 square feet of office, tech and flex industrial space.

One Scottsdale Medical is also under construction, with delivery scheduled for September this year. Developed by Ryan Cos., the 101,136-square-foot medical office project is part of a 120-acre mixed-use campus dubbed One Scottsdale, that will include up to 2.9 million square feet of office, retail, residential and hospitality space in Scottsdale, Ariz.

Construction starts in the first half of 2024 totaled 479,161 square feet across nine properties, while developers delivered seven office projects, totaling 478,494 square feet of space.

Among significant office properties that debuted in the metro year-to-date through June is Levine Investments’ 135,000-square-foot office and R&D building at 8240 S. River Parkway in Tempe, Ariz. The Class A facility came online with the help of a $44 million construction loan and is part of ASU Research Park—a business, research and recreational campus operated by Arizona State University.

Second-best-performing Sun Belt metro for sales

Year-to-date through June, Phoenix’s transaction volume reached $590 million, with 3.7 million square feet of office space changing hands across 44 properties, at average sale price of $165 per square foot. Phoenix’s office investment volume was the second-largest among Sun Belt metros, after the Bay Area ($823 million) and followed by Chicago ($542 million), Miami ($379 million) and Los Angeles ($273 million). On a national level, Phoenix ranked fourth, while Washington, D.C. led with $1.5 billion.

One of the priciest office deals recorded in the first six months of the year is Columbus Properties’ $86.1 million acquisition of 24th at Camelback I, a 302,209-square-foot building that changed hands in April. The eight-story Class A asset was sold by New York Life Real Estate Investors.

Another significant transaction was the $56.2 million sale of The Beam of Farmer, a 184,163-square-foot property in Tempe, Ariz. Cross Ocean Partners picked up the five-story Class A asset in May, from seller Mortenson.

Among peer markets, prices in the Valley were higher than in Chicago ($91 per square foot), Philadelphia ($93 per square foot), Charlotte ($128 per square foot) and Dallas ($123 per square foot), but lower than in Austin, where office properties traded at an average sale price of $435 per square foot.

Phoenix office market posts steady vacancy

As of June, the metro’s office vacancy clocked in at 18.2 percent, on par the national rate of 18.1 percent. Among similar markets, Austin recorded the highest rate, at 22.9 percent, followed by Dallas (21.8 percent), the Bay Area (20.8 percent) and Chicago (19.1 percent). The only peer market with lower vacancy was San Diego, at 17.9 percent.

Landlords are continuing to update their assets. Vero Capital, through its office investment platform Vero A2R, started a $29 million redevelopment plan at INISIO at Kierland, a 410,000-square-foot, two-building office campus in Scottsdale, Ariz. Stream Realty Partners is overseeing leasing efforts at the redevelopment project, expected to be completed in the fourth quarter of 2024.

Attracting flex office providers

As of June, the metro’s coworking sector included 1.2 million square feet of space, accounting for 1.7 percent of the metro’s total leasable office space, surpassing Charlotte (1.6 percent), Philadelphia (1.4 percent) and the Bay Area (1.2 percent).

The flex office providers with the largest total footprints in Phoenix were Regus, with 549,382 square feet, Expansive, with 204,127 square feet, Industrious, with 201,712 square feet and Bellagio Executive Plaza, with 158,862 square feet. Since February, Regus, Industrious and Expansive have each expanded in the metro.

In April, Lucid Private Offices signed a deal to open its second coworking space in the metro by signing a 25,000-square-foot leasing agreement with landlord Artis REIT. The company’s new location will be at MAX at Kierland, a 260,000-square-foot office building in Scottsdale, Ariz., that will include more than 100 private offices, with opening scheduled for November this year.