WESTERN SNAPSHOT, JANUARY 2008

Phoenix Office Market

Jaffe

During third quarter 2007, the Phoenix office market appeared to have taken one step forward and then one step back, as the vacancy rate rose to a little more than 13 percent from the previous quarter. Rental rates are increasing, together with the higher vacancy rates. The net absorption currently totals a little more than 650,000 square feet, as vacancies have also escalated in the area of subleased space.

Overall office vacancies have been declining since 2002, when rates peaked at more than 20 percent, inclusive of all classes of product. There were more than 60 buildings delivered in the third quarter, along with more than 8 million square feet under development at the end of the quarter. The good news is that the average rental rate has increased to more than $25.50, up from the previous quarter.

Building on third quarter 2007 numbers, all office classes were poised to continue positive net absorption in the fourth quarter. It is anticipated that One Central East, a 26-story, 485,000-square-foot office building being developed downtown by Mesirow Financial Real Estate, A & L Phoenix Development LLC and National Electric Benefit Fund, will be completed by fall 2009. Cityscape, another new high-rise office tower comprising more than 600,000 square feet of space, is also expected to open then. Aided by the advent of the light-rail system, downtown Phoenix is experiencing great demand for office space by law firms, accounting companies and other businesses.

Central business district office rental rates average about $25.80 per square foot, well below other submarkets in the metropolitan area. In the East Valley, rents run about $30.62 per square foot, and, in the west area, rates are approximately $28.11. The highest rental rates, about $30.62 per square foot, are in the east Phoenix area.

Opus West is developing 300,000 square feet of office space in Glendale. The multiple-building complex will include one three-story, two two-story and two single-story office buildings. In northwest Phoenix, Ryan Companies is building a 152,000-square-foot, three-floor medical office/retail project on a 94-acre parcel that will encompass 700,000 square feet of office space, multifamily offerings, retail pads and a hotel.

Located in Tempe Town Lake adjoining Arizona State University, Hayden Ferry Lakeside continues to expand with Phase II and III, which will add 295,000 square feet on 12 floors and 250,000 square feet on 10 floors, respectively. Also under construction on the east side is One Scottsdale, a mixed-use project that will include more than 1 million square feet of office space when completed. Just miles away is City North, another massive mixed-use development that will include 2 million square feet of office space. Both of these projects are located in North Scottsdale along the 101 freeway, which has seen tremendous growth over the last couple years. With more than 2 million square feet of office space under construction south of these major developments by Opus West, Alter Group and Lincoln Property on the Indian reservation, land in this area will continue to see growth for many years to come.

The outlook for the next several years appears to be strong, as long as the market can keep pace with the upcoming available space. A point has not been reached where new space has overpowered existing and vacant sites. The future Phoenix market will likely focus around the freeway and office space in both the North Scottsdale area and the west side around Glendale and Surprise. Investment sales have also been strong, even with cap rates dropping. There are more major players coming to Phoenix to invest, along with the long-standing local investors that have made this market a prime location.

Andrew S. Jaffe is vice president of sales/leasing at Commercial Properties Incorporated/CORFAC International in Phoenix.

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