• Phoenix

Will Metro Phoenix return to the ‘build it and they will come’ philosophy for office development?

By Curtis Hornaday

There’s no denying there’s demand for Phoenix office space. Vacancy is down and absorption is up. In a comparison of the 80 major metro markets Cushman & Wakefield tracks, Phoenix was eighth when it came to year-to-date net absorption.

Economics “101” would have you assume that if demand is up supply would naturally increase; and it has, but not much of that supply is available for lease. Instead, the bulk of new office space construction in metro Phoenix recently has been build-to-suit (“BTS”). We are seeing large sized tenants, both national and local credit companies that are turning to build-to-suit office options to meet their needs. Companies like State Farm, Northern Trust, Crown Castle, GoDaddy, Amkor and Isagenix all chose BTS options over existing office space.

Why the move to BTS? It goes back to the same supply versus demand equation. Companies want class A office space with large, open floorplates, 6 or 7/1,000 SF parking requirements, a location close to amenities and transit, and office space that helps them attract and keep workers. The problem is that when you look at existing office space there is little, if any, space that meets this list of requirements. Offices built as recently as 2010 are often considered functionally obsolete by companies, because of floor plate sizes, location or both. Between 1995 and 2010, over 50% of all of the office space built and leased with in Scottsdale, but over the past five years we have seen a fundamental shift as office users want more central locations, which has help submarkets like North Tempe.

In the past, Metro Phoenix was inclined to develop new office space to meet voids in the market. Developers were willing to take a leap and build spec confident that market demands would equate to leases. But spec construction has taken a back seat to BTS projects. The challenge with spec development taking off at this point is finding capital partners willing take the risk and if a developer make the math work. Even if the developer can demonstrate that the demand is there, are the users willing to pay the price in their monthly rent to justify spec development. For a few developers, in a few submarkets that answer has been yes.

In Chandler, both Allred and Irgens have moved forward on spec office projects, in Deer Valley USAA is building spec at Norterra and Glimcher chose to build spec on phase III at Scottsdale Quarter, successfully leasing space during early stages of their construction. But while we are seeing the emergence of spec construction, it is not nearly the level we saw during past cycles. So that poses the question, “Where are we in the current real estate cycle and are we at the front edge of more spec development or will the trend of BTS and a slower, more steadily delivery of office space be the new norm?”

Curtis Hornaday oversees the Cushman & Wakefield Research Department in the Phoenix office with a commitment to provide the most accurate, timely and insightful market information available. Curtis and his team maintain and analyze market data through the use of internal and external property databases. He produces timely market reports and publications delivered through translated analysis, market insights and recommendations for clients. Curtis works to manage local relationships between the Research Department, other company departments and the Cushman & Wakefield Real Estate Professionals within each real estate specialty.

Metro-Phoenix-Net-Absorption-Completions-Vacancy

Leave a Reply

Your email address will not be published. Required fields are marked *

  • Phoenix

© 2017 Cushman & Wakefield, Inc.