Phoenix Office Fundamentals Give Off Mixed Signals – What is a Ground Lease?

 Brokerage, Development, Investment, Office, Phoenix, West, #MarketUpdate, CommercialEdge 

Cavasson East is one of the office buildings at the 1.8 million-square-foot mixed-use campus. Image courtesy of MegaplanIT

The Phoenix office market witnessed both positive and negative traits in the first seven months of the year, as economic headwinds troubled the sector on various levels, according to fresh data from CommercialEdge. Construction activity picked up pace in terms of new projects entering the pipeline, but leasing slowed. The metro’s office sales also volume dropped, along with prices.

As of July, Greater Phoenix had more than 1.3 million square feet of office space were under construction, representing 0.9 percent of total stock. The rate climbed 30 basis points since March, but was lower than national figure of 1.6 percent of stock.

Some 802,400 square feet, or 59.3 percent of the total, entered the metro’s pipeline in the first seven months of the year. The amount was more than four times higher than the square footage recorded during the same period of 2022, when only 140,700 square feet broke ground.

READ ALSO: How Cautious Lending Impacts Construction Financing

One of The Valley’s more significant developments, a 150,000-square-foot office building within the Cavasson mixed-use campus in Scottsdale, got closer to completion in July. Nationwide Realty Investors broke ground on the project in 2022, with delivery slated for this October. At full build-out, Cavasson will encompass roughly 1.8 million square feet of office space, 1,600 residences and a hotel, as well as multiple retail, restaurant and amenity spaces.

Gilbert Spectrum Building 3 will comprise nearly 120,000 square feet of office space. Image courtesy of SunCap Property Group

Meanwhile, a new office project broke ground at the 64-acre Gilbert Spectrum campus in Gilbert. SunCap Property Group is developing the 119,222-square-foot building in partnership with GID. With expected delivery in the fourth quarter of 2024, the mixed-use complex will feature up to 850,000 square feet of office, flex industrial and tech space.

As for additions to supply, only 194,200 square feet have entered the metro’s inventory year-to-date through July. The largest new construction was Banner Sports Medicine Center, an 80,000-square-foot medical office building in Scottsdale. Alter broke ground on the three-story facility in April 2022 and the project at 7400 N. Dobson Road came online this May.

Phoenix office leasing decelerates

Vacancy has increased across the Phoenix office market since the beginning of the year. After clocking in at 17.0 percent in January and at 17.1 percent in February, the metro’s vacancy rate reached 18.9 percent in July, up 10 basis points month-over-month and marking a 500-basis-point increase year-over-year. The value was also 180 basis points higher than the national index of 17.1 percent that month.

Among similar secondary markets, The Valley ranked third after Charlotte (a 13.9 percent vacancy rate as of July) and Atlanta (18.7 percent), but surpassed Austin (20.5 percent).

READ ALSO: Will Some CRE Markets Be Too Hot to Handle?

Northsight Corporate Center is in the Scottsdale Airpark submarket. Image courtesy of CommercialEdge

In one of the largest deals of the January-July interval, Vanguard Group has expanded its Scottsdale office footprint by 133,634 square feet. The company leased space at Northsight Corporate Center, a 141,534-square-foot office building located at 14400 N. 87th St. in the Scottsdale Airpark submarket. CIM Group acquired the Class A property in 2019.

The Kimley-Horn lease marked another sizable leasing transaction in the metro. The firm committed to 78,482 square feet and will relocate its headquarters to Camelback Arboleda, a 178,792-square-foot building owned by Fenway Capital Advisors. The four-story property was completed in 1982.

Coworking remains afloat

The coworking sector remained stable across the metro, building on the newly found popularity of the flexible office space. Greater Phoenix had nearly 2.3 million square feet of shared office space as of July, representing 1.5 percent of its total rentable office space. The metro’s inventory was third after Atlanta’s (2.2 percent of the total rentable office space) and Dallas-Fort Worth’s (1.6 percent) but topped Charlotte’s (1.3 percent).

READ ALSO: As Hybrid Work Expands, Coworking Is No Longer the Exception

24th At Camelback II, a Class A office building in Phoenix. Image courtesy of Cushman & Wakefield

The Valley’s largest coworking firm as of July was Regus, with an inventory of roughly 412,300 square feet. Other operators included WeWork (with 354,400 square feet in its operational inventory), Expansive (204,100 square feet) and Industrious (139,800 square feet).

In addition, the metro’s coworking arena welcomed a new player in July. Texas-based flex office provider Lucid Private Offices signed a 26,910-square-foot lease at 24th At Camelback II, a Class A office building in Phoenix. A partnership between Hines and Invesco Real Estate is the developer and owner of the 306,877-square-foot property.

Fewer transactions for less

More than 3.6 million square feet of office space changed hands  in Phoenix since the beginning of the year, for a combined $587 million. The amount of traded square footage was half the one recorded during the same period of 2022, when some 7.2 million square feet changed hands for more than $1.84 billion.

In July, the median sale price per square foot in Greater Phoenix was $213, above the national average of $196 but down 23.4 percent year-over-year. When compared to similar secondary markets, the metro fared better than Charlotte ($157) and Atlanta ($158) but lagged Dallas-Fort Worth ($235) and Austin ($369).

In one of the priciest deals of the period ending in July, Virtus Real Estate Capital paid $48.5 million for Banner Health Center Plus at The Grove, a 70,000-square-foot medical office building in Phoenix’s Arcadia neighborhood. The facility is part of The Grove, a $400 million, 750,000-square-foot mixed-use project by RED Development.

The metro’s largest portfolio sale in terms of square footage involved three of the four flex office buildings at Warner Crossing Business Park in Tempe. Granite Peak Partners acquired the single-story assets which total 202,027 square feet from The Carlyle Group for $34.5 million, financing the purchase with a $20.1 million loan from Mutual of Omaha.

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 Read the latest market update, based on CommercialEdge data.
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In the simplest form, a ground lease is a long-term net lease (usually 49 years or 99 years) of land including any improvements on the said land. Assets that can be subject to a ground lease include but are not limited to, vacant land, office buildings, and large residential buildings.

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