Q2 2012 Phoenix, Arizona Office Submarket Trends

CRE Resources

View our Phoenix, Arizona Submarket Map

Q2 2012 Phoenix, Arizona Office Submarket Trends

Overview. The 70.7-million-square-foot Phoenix office market is unusual among major U.S. markets for the decentralized distribution of its inventory among numerous far-flung submarkets. With the exception of Scottsdale’s 15.6 million, all submarkets host fewer than 10 million square feet. This arrangement is an outgrowth of the region’s sprawling growth and “patchwork” development patterns generally. Accordingly, metro Phoenix has lacked a dominant, magnetizing downtown: by Reis’ count, the Central Business District (CBD) hosts only 6.1 million square feet of competitive space; the neighboring Camelback Corridor claims 9.8 million. The lack of a major downtown market with an associated collection of trophy properties has been seen as an obstacle to Phoenix’s hopes to emerge as a world-class city with a world-class corporate tenant base.

East Valley: Mesa/Chandler

  • The greater East Valley area includes the cities of Mesa, Chandler, Tempe and Gilbert. Reis divides these into two separate submarkets, as indicated.
  • With high-tech industry playing a significant role in the 5.7-million-square-foot Mesa/Chandler submarket, market trends have been reflective of trends in that often volatile sector. Oversupply, accordingly, has been a frequent factor here.
  • Development has tended toward moderate-size campus-style facilities. Office-condo development also has been popular in this area.
  • The latest bout of construction peaked with the delivery of 1.6 million square feet over the three-year span 2007-2009.
  • No general purpose competitive space delivered in 2010, 2011 or year-to-date in 2012. None will complete by year-end. New construction, however, is underway (see below).
  • First half 2012 net absorption was low at 17,000 square feet, all of which occurred during second quarter.
  • Vacancy ended the latest quarter at 27.6%, down 30 basis points for the period, down 90 year-over-year.
  • At $20.94 psf and $15.78 psf, second quarter asking and effective average rents were each down one cent from the quarter before and were down 0.1% and 0.2% since year-end following growth at 0.0% and 0.2% all told in 2011.
  • Two projects, both started during the first quarter of 2012, were under construction per the date of this report, as follows.
  • The 92,100-square-foot speculative Building 6, part of the planned 258,000-square-foot, three-building second phase of Allred Park Place, got underway in January at S. Price Street and W. Willis Road in the “Price Road Corridor,” Chandler. A completion date was not specified. Douglas Allred Company is the developer.
  • More. In May, Infusionsoft, a small business marketing software development company, leased the entire building, according to industry sources.
  • More. Other major “Price Road Corridor” tenants include eBay and Intel Corporation,
  • Phoenix Business Journal reported in May.
  • Reis reports a 114,100-square-foot building for Arizona Department of Economic Security under construction at 120 W. 1st Avenue, Mesa. Ground was broken in February. A completion date is not specified.
  • New project pending. Rockefeller Group Development Corporation (developer of New York’s Rockefeller Center) will develop the 24-acre, 844,000-square-foot multi-phase Chandler 101 business park at Price Freeway (Loop 101) and Chandler Boulevard.
  • More. A 2012 groundbreaking is anticipated for the first phase, reported locally at 263,000 square feet. The developer “wants to lease at least 150,000 square feet” of the first tower prior to starting, East Valley Tribune (EVT) has reported. Arizona State University will be a tenant, according to Phoenix Business Journal.
  • Second quarter leases include a 10-year deal by QBE Insurance Group for 183,000 square feet of Class A space at 2700 W. Frye Road, Chandler, according to industry sources. Occupancy should follow in November.
  • As indicated, Infusionsoft Inc. has leased the 92,100-square-foot Class A Building 6 now underway at Allred Park Place.
  • Outlook. Reis expects about 35,000 square feet of net absorption over the remainder of the year. A year-end vacancy rate of 27.0% is forecast. Growth rates on the order of 0.9% and 0.8% are projected for the average rents for the year. A stronger performance across the board should follow in 2013 as demand picks up.

East Valley: Tempe

  • A total of 401,000 square feet delivered to the 7.9-million-square-foot Tempe submarket in 2011, all in Fountainhead Office Plaza at Fountain Avenue and S. 55th Street. USAA Real Estate and locally-based Metro Commercial Properties were its developers. The building is 100.0% leased to University of Phoenix through 2023.
  • No office projects of any type were under construction in Tempe per the date of this report.
  • First half 2012 total net absorption was negative 87,000 square feet. While the total was positive in 2011, it trailed same-year new supply nonetheless.
  • Second quarter vacancy was 21.9%, up 70 basis points for the period, up 100 year-over-year.
  • At $20.26 psf and $14.93 psf, second quarter asking and effective average lease rates were down 0.1% each for the period following larger losses the quarter before. Growth rates for 2011 were 0.3% and 0.7%.
  • A new project. Aetna Insurance will have a 140,000-square-foot office building built at Liberty Property Trust’s 280-acre, 1.2-million-square-foot “flex, office-industrial and R&D space” Liberty Cotton Center Business Park, GlobeSt.com reported in August. A start the same month is expected; completion will follow in June 2013.
  • More. Aetna signed a long-term lease on the building, which is being designed for LEED certification.
  • Update. Ryan Companies and Sunbelt Holdings would like to start construction by year-end on the $50 million, 10-story, 250,000-square-foot Hayden Ferry Lakeside III on E. Rio Salado Parkway, EVT reported in June. The projects two existing towers are 94.0% leased, EVT reported in March.
  • More. “The companies anticipate breaking ground by the end of the year if enough pre-leases are signed,” according to the source.
  • A new spec project. Metro Commercial Properties is marketing the 384,300-square-foot, 14-story speculative Fountainhead Park Summit building planned for Fountainhead Corporate Park, EVT reported in June.
  • More. “Tempe’s office market has recovered faster than expected,” a Metro executive informed this source. The new project and the park are financed by USAA Real Estate Company.
  • Second quarter leases include a 140,000-square-foot signing by State Farm at Papago Buttes Corporate Plaza, Tempe, reports Jones Lang LaSalle.
  • Cushman & Wakefield reports a 65,600-square-foot second quarter lease by Allstate Insurance at 222 S. Mill Avenue, Tempe.
  • Outlook. A positive turn over the remainder of the year will result in a year-end net absorption total of about 10,000 square feet. Vacancy is expected to drop below 21.0% by year-end and should be under 19.0% by year-end 2013 as progress continues. Gains of 0.6% and 0.7% are forecast for the average asking and effective rents for the year with larger gains to follow in 2013 and after.

Scottsdale/North Phoenix

  • The 15.6-million-square-foot Scottsdale submarket, anchored by Scottsdale Airpark, is the largest metro-wide. It has led all others in recent development. Soaring vacancy and declining rents, however, have been serious issues in the recent term.
  • No space has completed in the Scottsdale market since 647,000 square feet delivered in 2009. No space will complete in 2012. No projects were under construction per report date.
  • Demand rebounded sharply in 2011—and again in the latest quarter. The total for the first half of 2012 was 158,000 square feet. The second quarter total alone was 221,000 square feet.
  • Vacancy ended the quarter at 28.0%, down 140 basis points for the period, down 160 year-over-year.
  • At $24.39 psf and $19.09 psf, second quarter asking and effective average lease rates were up 0.2% and 0.3% for the period following gains of 2.2% and 1.8% the quarter before.
  • Office space at the stalled Scottsdale Quarter mixed-use development “has been popular among companies seeking the work-live-play environment,” Phoenix Business Journal reported in late July.
  • Commentary. Scottsdale Quarter’s survival, “despite an untimely opening, is largely because of recession-induced misgivings of similar mixed-use projects, such as the stagnant One Scottsdale development that has yet to be erected and the flop of CityNorth, both just a few miles north,” an executive with Colliers International informed the source.
  • Construction at the SkySong development at SkySong Boulevard and N. Scottsdale Road may soon resume, The Arizona Republic reported earlier this year. Preleasing for the third office building began in January. SkySong’s existing 300,000 square feet are 98.0% occupied, as of April.
  • More. SkySong 3, put by Reis at 145,000 square feet, could be underway before long. SkySong 4, also at 145,000 square feet, also is planned.
  • Outlook. A small negative net absorption total over the remainder of the year should result in a year-end sum of 143,000 square feet. Vacancy is forecast to end the year at 28.1%. Gains of 2.9% and 2.7% are expected for the average asking and effective rents for the year. Additional improvement is forecast for all parameters for
  • 2013.

North Central

  • The 3.5-million-square-foot adjacent North Central submarket combines areas of
  • Scottsdale and north Phoenix.
  • No competitive general purpose space has completed in the North Central submarket since 2007.
  • A total of 137,000 square feet were underway per report date, as described below.
  • First half 2012 net absorption was 31,000 square feet.
  • Vacancy closed second quarter at 22.6%, down 50 basis points for the period, down 330 year-over-year.
  • At $20.98 psf and $17.58 psf, second quarter asking and effective average rents were down 0.2% each for the period following minimal increases the quarter before.
  • The 137,000-square-foot Desert Ridge IV broke ground at N. Tatum Boulevard and E. Deer Valley Road, Phoenix, in April. The completion date is not specified. A 93,600-square-foot fifth phase is planned.
  • A 191,600-square-foot American Express owner-occupied facility completed at the Desert Ridge III project in January 2011.
  • Also finishing last year was the 220,000-square-foot FBI Regional Headquarters build-to-suit at 21711 7th Street, Phoenix. The project completed in December. The Ryan Companies was selected by the federal GSA to construct the project.
  • Outlook. No additional net absorption is expected for the remainder of the year. Gains of 0.7% and 1.6% are forecast for the mean asking and effective rents for the year.

Phoenix CBD

  • Due to the metro area’s decentralized development pattern, the Phoenix CBD submarket hosts only 6.1 million square feet existing inventory, a small fraction of the total metro area market.
  • Other central area submarkets as defined by Reis include East Central and Camelback (see the section following).
  • With no new space completing construction in the CBD in 2011, net absorption was positive at 177,000 square feet. The first half of 2012 followed with negative 6,000 square feet.
  • No CBD space has completed construction since 568,000 square feet delivered in second quarter 2010 at RED Development’s $900 million CityScape mixed-use project that April.
  • More. The Republic reported CityScape “virtually full” as of February 2012.
  • No space will deliver this year. No projects were under construction per the date of this report.
  • Vacancy ended the latest quarter at 19.4%, up 50 basis points for the period, down 230 year-over-year.
  • At $29.05 psf and $22.71 psf, second quarter asking and effective average lease rates were down 0.3% each for the period following first quarter’s losses of about 1.0%.
  • Outlook. Positive net absorption at close to 50,000 square feet is expected for the year’s second half. Vacancy should end the year at about 18.5%. Modest growth is anticipated for average rents.


  • No general purpose office space has delivered to the 9.8-million-square-foot Camelback submarket since first quarter 2010, when 484,500 square feet were completed, including the 307,000-square-foot 24th at Camelback II.
  • No space will deliver in 2012. None was under construction per the date of this report.
  • Net absorption for the first half of 2012 was strong at 227,000 square feet.
  • Second quarter vacancy was 24.4%, down 110 basis points from the quarter before, down 210 year-over-year.
  • Rents have been essentially flat year-to-date. At $23.89 psf and $19.23 psf, second quarter asking and effective averages each was down 0.1% since year-end. Growth was negative in 2011.
  • Outlook. Reis expects absorption to put on the brakes during the second half of the year; a year-end total of 215,000 square feet is anticipated along with a year-end vacancy rate of 24.5%. Gains of 0.4% and 1.3% are expected for the average asking and effective rents for the year.


  • Although not yet with large office presence, the western suburbs have emerged as Phoenix’s new growth area.
  • The Alter Group and John F. Long Properties “will jointly develop three major business parks in West Phoenix totaling in excess of 1,500 acres… on both sides of the Loop 101 freeway,” Business Wire reported in March.
  • More. “The parks will offer virtually every type of commercial space, including medical office buildings, Class A office space, light industrial and retail, and are expected to drive economic expansion for West Phoenix for several decades.”
  • Dignity Health leased 63,400 square feet during second quarter at 4129 E. Van Buren Street, Phoenix, north of Sky Harbor International Airport in the East Central submarket, industry sources report.
  • Jones Lang LaSalle reports a 59,804-square-foot second quarter lease by Liberty Mutual Insurance in the first phase of Canyon Corporate Plaza in Phoenix in the Northwest submarket.