Phoenix Office Deal Volume Among Largest in the Nation

Article originally posted on Commercial Executive Magazine on April 8, 2024

The Phoenix office market maintained its position as one of the nation’s leaders in investment, with its active sales activity placing it second across similar Sun Belt cities, CommercialEdge data shows. In line with last year’s drop in construction activity, Phoenix had only one office property delivered in the first two months of 2024, while the metro’s under-construction pipeline is one of the smallest among its peers.

As of February, Phoenix had 940,968 square feet of office space under construction across 16 properties, accounting for 0.6 percent of the existing inventory. The metro’s pipeline was the smallest across Sun Belt metros, while Dallas led with 6.7 million square feet underway, followed by San Diego (5.5 million square feet) and Austin (4.3 million square feet.)

A significant office project currently under construction is Verde Investments’ Tempe Vale, a 132,972-square-foot Class A office building in the metro’s Tempe Mill submarket. The property broke ground in May last year and is scheduled for delivery by the end of May 2024.

Another notable office development underway is Gilbert Spectrum’s Building 3, that commenced construction in July 2023 and is expected to be completed this May. The 119,222-square-foot Class A building is part of SunCap Property Group’s expansion of Gilbert Spectrum, a business campus that will total 850,000 square feet of office, flex industrial and tech space.

One Scottsdale Medical, scheduled to come online in September this year, will encompass 101,136 square feet of medical office space. Ryan Cos. commenced construction on the facility in June 2023. The project is part of a 120-acre mixed-use development dubbed One Scottsdale, designed to include 2.9 million square feet of office, hospitality, retail and residential space.

A drop in construction starts

Construction starts in the first two months of the year totaled 107,400 square feet across three properties. In 2023, a total of 717,085 square feet of office space started to rise, spread among 12 projects.

Last year, there were 10 completed properties, encompassing 639,219 square feet and accounting for 0.4 percent of the existing stock. One of the Phoenix market’s significant deliveries remains Wentworth Property Co.’s Rio Yards at Novus Innovation Corridor’s Building A, totaling 148,356 square feet of Class A office space. The property is in Tempe, Ariz., and has reached completion in August last year.

In the first two months of 2024, there was only one delivery in the metro: a 35,587-square-foot medical office building in Gilbert, Ariz. Dubbed Verde Medical Center, the three-story property is owned by Sina Cos. and is part of the 23-acre mixed-use development known as Verde at Cooley Station.

Phoenix among best-performing metros for office deals

As of February, 915,740 square feet of office space, or 16 properties, changed hands in the metro, for a total investment volume of $139.6 million. So far, this deal amount represents a 23.6 percent decrease, compared to the first two months of 2023. The metro’s sales volume is the second-highest among Sun Belt cities, following The Bay Area’s $371.6 million, while Nashville came in third place with $61.6 million in investments.

Last year ended with 7.4 million square feet of space changing hands for a total of $1.1 billion. The amount places Phoenix among the top three best-performing Sun Belt metros, after the Bay Area’s $1.3 billion and followed by Denver’ placed third, with ‘s $1 billion sales volume.

Office deals fluctuated in 2023—the first quarter ended with $279.7 million in office sales, while the second quarter showed a slight drop. Sales picked up in the third quarter, when 2.4 million square feet of space changed hands for $344.4 million, while the year’s last three months brought an additional $258.4 million in office investments.

Last year, office properties in Phoenix changed hands at an average sale price of $180.9 per square foot. Among its peers, Phoenix was pricier than Philadelphia ($154.1 per square foot), Charlotte ($131.1 per square foot), Houston ($123.9 per square foot) and Dallas ($117.9 per square foot), but showed lower prices than San Diego ($328.2 per square foot).

So far in 2024, office properties in Phoenix changed hands at an average of $166.5 per square foot, placing the metro among the cheapest office markets, while Austin led with $542.8 per square foot, followed by San Diego ($301.8 per square foot) and The Bay Area ($210.3 per square foot).

One of the priciest office deals in 2023 remains Virtus Real Estate Capital’s $48.5 million acquisition of Banner Health Center Plus at The Grove. The 70,000-square-foot medical office building is part of RED Development’s the Grove, a $400 million mixed-use development that will total more than 750,000 square feet.

Phoenix office vacancy rate continues to rise

Office vacancy in the metro clocked in at 17.9 percent as of February, on par with the national rate. Houston had the highest rate among similar markets, at 24.5 percent, while Denver and Austin followed with 22.1 percent, Dallas with 21.1 percent and the Bay Area with 20.8 percent.

Significant office leasing deals in the metro include Menlo Equities’ 136,194-square-foot deal at One Compass Center, where tenant Peckham Inc. signed a full-building commitment. The deal marked 2023’s largest office lease.

The second-largest deal in the metro consists of Vanguard Group’s 133,634-square-foot office expansion at Northsight Corporate Center, in the Scottsdale Airport submarket. CIM Group is the owner of the Class A office property.

Coworking sector slowing down

As of February, The Valley’s flex office inventory comprised 1.2 million square feet of space, outpaced by Dallas (2.5 million square feet), Atlanta (2 million square feet), as well as Houston and the Bay Area, both with 1.8 million square feet. The metro’s share of coworking space as percentage of total leasable office space reached 1.5 percent, below the national figure of 1.7 percent.

Year-to-date through February, Cubework had the largest footprint of leasable office space in Phoenix, with locations totaling 1,944,745 square feet. Additional flex office providers with significant footprints in the metro are Regus, with 512,756 square feet, Industrious, with 194,570 square feet and Expansive, with 146,032 square feet.

In October, Industrious also opened a new 27,263-square-foot coworking space at Kierland Commons, in Scottsdale. The mixed-use building spans 466,700 square feet and is owned by Macerich. The deal marked