Delta Associates

Market Information: Phoenix

Economy

Office

Flex/High-Tech

Economy: First Quarter 2008

Valley Economy: Job Growth Modest

The Greater Phoenix economy continues to decline from the robust growth of 2005 through the first half of 2007. Greater Phoenix added 14,000 jobs in the 12 months ending January 2008. That rate of job growth is a modest 0.7%, far below the 5.4% growth of one year ago.

The Greater Phoenix unemployment rate increased to 4.0% in January 2008 from 3.9% 12 months earlier. The national unemployment rate was 4.9% in January. The unemployment rate in Greater Phoenix continues to be among the lowest in the nation.

For the third consecutive month, The Arizona Business Conditions Index fell below the growth threshold of 50, indicating a short-term contraction in the local economy. The index now stands at 46.3 in February 2008, a 3.9% decline from the previous month. Dawn McLaren, research economist at the W.P. Carey School of Business, says that "The Index usually provides a four- to six-month heads-up on growth and recession in the local economy." Greater Phoenix lost 2,200 manufacturing jobs -- down 1.6% -- over the 12 months ending January 2008.

Office Market: First Quarter 2008

Declining Market Conditions

Despite absorption ticking up from the previous quarter, demand for office space is softening as payroll job growrth continues to decelerate in Greater Phoenix. The overall vacancy rate has increased 370 basis points since the 1st quarter of 2007 and will continue to rise given the Valley's active construction pipeline.

Highlights:

Net absorption of office space totaled 599,000 SF in the 1st quarter of 2008.
Available sublease space increased by 223,000 SF in the 1st quarter of 2008 and represents 1.4% of standing inventory.
The overall vacancy rate in Greater Phoenix was 15.2% in the 1st quarter of 2008, compared to 11.5% one year ago. The direct office vacancy rate was 13.8% in Greater Phoenix in the 1st quarter of 2008, up from 10.6% a year ago.
There is 6.6 million SF of office space under construction or renovation in the Valley in the 1st quarter of 2008, compared to 7.6 million SF a year ago. Of that space, 20% is pre-leased, down from 37% one year ago.
In the 1st quarter of 2008, 2.6 million SF of office space has been delivered at 44% leased.
Class A rents grew at an annualized rate of 0.9% in Greater Phoenix in the 1st quarter of 2008, but quarterly rent performance was uneven across the market.
Office investment sales were strong in the 1st quarter of 2008, though below last year's robust pace. Sales volume totaled $602 million, compared to $857 million one year ago. Office sale prices in Greater Phoenix averaged $244/SF in the 1st quarter of 2008, up from $205/SF in all of 2007.

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Flex/High-Tech: First Quarter 2008

Highlights:

The flex/high-tech market in Greater Phoenix began 2008 at a sluggish pace, with negative 13,000 SF of net absorption.
Available flex/high-tech sublease space increased by 105,000 SF in the 1st quarter of 2008. Sublease space now represents 1.3% of the flex/high-tech standing inventory.
The overall flex/high-tech vacancy rate was 13.6% in the 1st quarter of 2008, up from 12.4% at year-end 2007 but down from 15.3% a year ago. The direct vacancy rate in the 1st quarter was 12.3%, up from 11.9% at year-end 2007 but down from 13.7% a year ago.
Four flex/high-tech space totaling 128,000 SF delivered in the 1st quarter of 2008 at 0% pre-leased. In the 1st quarter of 2007, 176,000 SF was delivered at 32% pre-leased.
Flex/high-tech rents increased at an annualized rate of 3.1% in the 1st quarter of 2008.
Sales volume of flex/high-tech buildings totaled $534.2 million in the 1st quarter of 2008, up from the $291 million in all of 2007. Flex/high-tech sale prices averaged $98/SF in the 1st quarter of 2008, down from $119/SF in 2007.

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