WESTERN SNAPSHOT, APRIL 2006

Scottsdale, Arizona Office Market

Becker

New construction in Scottsdale was the highest in the Valley with 833,922 square feet built in 2005. Reacting to tenant desire to occupy the best space in the market, owners are raising their rental rates and reducing concessions. Higher construction and land costs continue to push rents for new product to higher levels. Currently, there are more than 2.1 million square feet under construction in Scottsdale, far exceeding the East Valley’s 874,027 square feet.

As companies are eager to expand and relocate to the Phoenix metro market, the demand for office space will continue to outweigh the available supply, according to office forecasts. One area to note is office condominiums, which have become a popular niche for businesses looking to own versus lease. This includes newly constructed office condominium parks as well as existing office building conversions. Many business owners select office condos due to their potential for value appreciation and the lower cost of ownership, versus leasing with no opportunity for return on their money.

Challenges for the entire metro Phoenix office market will be the lack of available land on which to build new developments, the lack of large blocks of office space available for lease and the lack of Class A space, of any size, in every submarket.

In comparison to other American cities, the office vacancy rate at the end of 2005 for the entire Phoenix market was 11.8 percent, far below the vacancy rates of Dallas (18.9 percent), Denver (14.9 percent) and San Francisco (12.1 percent). The U.S. office market continues to tighten at a steady, predictable pace, with the vacancy rate falling. Several Arizona communities reported some of the fastest job-growth rates in the country from December 2004 to December 2005, according to new data released by the U.S. Bureau of Labor Statistics. Comparing 311 metropolitan areas in the United States, the Phoenix-Mesa-Scottsdale area posted the largest year-over-year employment gain at 83,200 new jobs.

Downtown Scottsdale is a hotbed of development, with many of the current projects expected to stimulate the economics and real estate dynamics of the area. The commercial and residential projects proposed, under construction and completed since 2003 are worth $1.5 billion, of which 82 percent of that total is private money, not city, state or federal dollars.

Scottsdale Waterfront is an 11-acre residential, retail and office development approved for the northern bank of the Arizona Canal, at the intersection of Scottsdale and Camelback roads. Currently under construction is Phase I, which comprises retail space, office condo units and a two-level underground parking structure. The total investment is $250 million.

Other projects currently in downtown Scottsdale include the ASU Scottsdale Innovation Center, 37 acres of dirt at the southeast corner of McDowell and Scottsdale roads that, according to plans, will accommodate 1.2 million square feet built in the next 10 years. The first phase will be more than 300,000 square feet, of which ASU is taking 80,000. Backers say the long-term potential is a $300 million center, which is being jointly developed by Peoria, Arizona-based The Plaza Companies and Chicago-based Higgins Development Partners.

Portales Corporate Center’s second phase is slightly smaller with 179,000 square feet on five floors and a three-level underground parking garage. Developer Forum Capital has offices in Portales I. The Scottsdale Galleria is being completely remodeled from a retail mall into a Class A office complex in a $65 million effort. The Plaza/South Canal Bank project is new construction mixing office, restaurant and retail uses just south of the Arizona Canal on the north side of Stetson Avenue. The total investment is $14.5 million.

Recent investment sales in Scottsdale have included Perry Living Trust’s purchase of the 179,888-square-foot Scottsdale Executive Office for $37 million ($205.50 per square foot). Shea Corporate Medical Center, located at 7032-7054 E. Cochise Road in Scottsdale, sold for nearly $5.4 million (approximately $233 per square foot) to the investment group Magnolia Industrial LLC. The property is currently 100 percent leased. Also, Opus Calendar Stick Building C was purchased for $174 million. Scottsdale Investment Property LLC purchased the 45,700-square-foot office building, located at 9221 E. Via de Ventura, for $162 per square foot with a pro forma cap rate of 8.78 percent.

Laura Becker is a senior associate for GVA DAUM in Phoenix.

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