In Q1 2018, activity in the financial services and tech industries coupled with improving economic fundamentals drove demand for office space.
The Phoenix office market’s net absorption of 154,716 sq. ft. during Q1 2018 marks the 31st consecutive quarter of positive net absorption.
The overall vacancy rate for metropolitan Phoenix ended Q1 2018 at 16.5%. This represented a 80 basis point (bps) decrease year-over-year.
The average asking lease rate for the Phoenix office market was $25.65 per sq. ft. full service gross (FSG-annual) at the end of Q1 2018, representing a 3.2% annual increase. At quarter-end, the Class A average asking rate was $34.14 per sq. ft. Over the same period, the Class B and Class C average asking rate was $25.10 per sq. ft. and $19.04 per sq. ft., respectively.
At the end of Q1 2018, approximately 2.6 million sq. ft. of office space was under construction in 19 buildings, 77% of which is speculative. Most of the new speculative product to break ground during the quarter is focused in the Southeast Valley along the Loop 101 and 202.
New construction aside, there was also a notable amount of space repositioned to office in the past 18 months. Roughly 640,000 sq. ft. was converted to office from former back office/flex space during 2017.
The Phoenix metro economy is expected to remain healthy for the remained of 2018. An improving labor market underpins this outlook and barring any major external shock, job growth is projected to continue.