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Who Will Occupy Speculative Office Space in Phoenix?

CoStar Market Insights: Financial Industry Driving Absorption in New Product
June 11, 2018
Speculative construction is on the rise in Phoenix. At the end of the first quarter of 2018, more than 2.1 million square feet was available in under construction office projects.

Office fundamentals in Phoenix have steadily improved throughout the course of this cycle. Vacancies have been below their historical average since 2016 as consistent demand has outpaced relatively low levels of construction. But at the end of the first quarter of 2018, more than 2.1 million square feet were available in office projects under construction, the most spec construction Phoenix has seen since the fourth quarter of 2008. Speculative office development has not been as rampant as it was in the previous cycle, but the current state of fundamentals warrants the uptick in these types of projects. Speculative building typically occurs when a developer is confident enough to break ground on a project without tenants already in place, but anticipates strong demand during and after construction. Phoenix’s multi-tenant speculative projects that delivered in 2017 had less than a 20 percent availability rate at the end of May 2018.

Financial corporations have had a strong appetite for new office space in Phoenix as they attempt to obtain the best talent in the metro, most of which resides in the East Valley. MUFG Union Bank, Santander, and Liberty Mutual, among others, have recently taken space in newly constructed office buildings located in the East Valley region. Per capita, Phoenix has one of the higher concentrations of financial jobs in the U.S., bolstered by the region’s growing and skilled workforce.

In addition to Phoenix’s talented labor pool, a business-friendly environment is one of the main draws for companies that decide to open operations in the Valley. The corporate tax structure in Arizona is significantly more appealing than many nearby states, particularly those on the West Coast. Local officials have also been proactive in fostering business development and innovation. Earlier this year, Arizona became the first state to pass a 'regulatory sandbox' bill to spur growth in budding financial technology industries, including blockchain and cryptocurrency.

Phoenix’s improved fundamentals and recent string of corporate expansions and relocations portend well for future office demand. Recent economic developments, including Arizona’s newly introduced 'regulatory sandbox', could open the door for a fledgling company to take advantage of the state’s loosened regulations on financial technology startups. Phoenix has also been one of the fastest-growing tech markets in the country over the past five years, with many Bay Area companies setting up outposts in the Valley, a trend poised to continue.

Regardless of who takes the speculative office space in metro Phoenix, tenants will have more options to choose from than at any point in this cycle. Employers understand a contemporary office space with the latest amenities is essential to securing the metro’s best talent, and financial companies have been capitalizing on this dynamic. The metro’s high concentration of financial jobs, Arizona’s attractive corporate tax structure and business-friendly environment have produced strong demand for new office space, a trend speculative developers are banking on continuing.

CoStar Market Insights provides a snapshot of recent real estate trends. The CoStar Market Analytics team monitors commercial and multifamily real estate across 390 metro areas, with a granular understanding of the projects, players and economic trends that move these markets.

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