Office leasing may soon revive in Arizona

Jim McLeod July 18, 2011

Owners of all but the most desirable Phoenix-area office properties have yet to benefit from a recent uptick in commercial-lease signings. That could start to change in the coming months as all of the prime spots begin to fill up, a group of local analysts said.

With the area’s unemployment rate above 9 percent and local analysts predicting anemic job growth in the second half of this year, there is little chance of a significant improvement in the Phoenix-area office-vacancy rate, which is estimated to be about 27 percent.

Still, office-market analysts said it’s likely that more property owners will begin to see prospective tenants walking through their doors within the coming year.

Why? Because it won’t be long before all the best spots are taken, said John Bonnell, managing director of commercial real-estate firm Jones Lang LaSalle in Phoenix.

So far, the prime beneficiaries of intramarket office relocations have been top-shelf office properties such as CityScape and the Tower at One North Central, both of which added new tenants to their building directories in the second quarter.

The next tier of properties – those slightly smaller, older or more remote – have yet to benefit from local moves, but Bonnell said that could change within the next year.

“The good news for the overall market is that the ‘A’ market is starting to get leased up,” he said.

Bonnell said the torrent of office relocations that began last year was expected to continue well into 2012, hopefully long enough for some excess demand for “Class A” office space to spill over into the lower classes.

Sales of office, industrial and retail properties picked up considerably in the first six months of this year, but commercial real-estate brokers and researchers said the majority of office-market transactions involved leasing activity, as many businesses sought to relocate to a more-desirable location and lock in a long-term lease rate at market-bottom prices.

Mark Dancer, research director at Jones Lang LaSalle, pointed to another notable positive development in the office market: Most of the vacant space available for sublease in the popular office submarkets has been filled. Subleased space, or situations where another tenant is leasing the space but not using it, is usually the least-expensive space on the market, so having the bulk of that office space off the market could help strengthen lease rates overall.

While the vast majority of lease deals signed in the first six months of the year involved companies moving across town – or, in some cases, across the street – a few key expansions helped the market absorb about 325,000 net square feet of vacant space in the first six months of the year, according to Jones Lang LaSalle’s data.

Downtown Phoenix fared better than any other local office submarket in the second quarter, picking up a number of large office tenants.

They included the for-profit Phoenix School of Law, which signed a lease deal in April with the Tower at One North Central for about 250,000 square feet, roughly double the space it had been leasing a few miles north at 4041 N. Central Ave., near Indian School Road.

The 1.8-million-square-foot CityScape project also continued to add law-firm tenants, the most recent addition being Cantor Law Group, which announced plans to relocate from Tempe to a 15,000-square-foot space in the downtown Phoenix area’s newest office-retail project, where six other law firms already reside.

To some, 2010 was a turning point for the flagging office market, because the amount of leased space increased slightly after two years of net decreases. But it wasn’t enough to help property owners currently are sitting on almost 20 million square feet of vacant space.

The larger, recent lease deals have helped boost the confidence of property owners who did not benefit directly from them, Bonnell said.

There may be a lot of vacant office space in the Phoenix area, but no one is building any more for the time being, he said, and much of what’s out there is “functionally obsolete,” because it lacks one or more modern features nearly all prospective tenants would require.

That fact has spurred some local businesses to seek out a better office space now, rather than later, he said.

“There’s a sense that there is a fixed amount of inventory,” Bonnell said.

Extract of the Arizona Republic

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