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Posted Nov 15, 2019, 4:12 PM
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Modulator
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Join Date: Nov 2013
Location: Phoenix, AZ
Posts: 4,405
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A downtown revival
Posting here since it's not really development related. Phoenix Business Journal article on Downtown vacancy rates and how some investors are expecting an office resurgence. I sure hope so.
Quote:
By Corina Vanek – Reporter, Phoenix Business Journal
Nov 15, 2019, 5:00am MST
When Jorge Escobar’s Miami-based real estate investment firm Black Salmon bought the 101 North tower, the second-tallest building in Phoenix in August, the firm saw the high-rise as an opportunity to create value in a central business district that has matured more slowly than other Valley submarkets.
“We are firm believers that downtowns are re-emerging,” Escobar said. “Young employees want to work closer to their homes, near good bars and sports. Everything in downtown Phoenix matched our investment philosophy in the company.”
Downtown Phoenix has not benefited in the way that hot office markets in other areas of the Valley, like Tempe, have enjoyed in recent years. Yet some brokers and owners who have listings and specialize in downtown are increasingly optimistic. Though the submarket has lagged others in leasing, the area might be a sleeping giant as Arizona State University’s downtown presence continues to grow, the area’s bar scene becomes increasingly popular and multifamily development brings more residents into the city core between Seventh Street and Seventh Avenue.
“Downtown is a little bit behind other submarkets there, like Tempe and Scotts-dale,” Escobar said. “There is more of an opportunity to create value. If you have a medium- to long-term view, downtown has more potential to create value.”
Challenges certainly remain. A glut of older office buildings in need of renovation and worries about parking availability might scuttle tenant plans to lease downtown and continue the rush to the suburbs, industry experts said.
“Downtown has gotten so much attention lately, and the catalyst has been ASU, and now Thunderbird [School of Global Management],” said Jessica Morin, director of market analytics for CoStar in Phoenix. “It has brought multifamily, retail, restaurants and entertainment downtown. Ten years ago, you didn’t see people walking around downtown after work. But we have not seen that change much on the office side.”
Still vacant
While some suburban submarkets, notably Tempe and the East Valley, have seen steep declines in office vacancy rates, downtown Phoenix has not. During the past 12 months, downtown has seen negative net absorption of office space, meaning there have been more companies moving out or downsizing their spaces than those moving in or increasing their footprints, according to CoStar data. As of October, demand for office space in downtown decreased by 136,574 square feet since the beginning of the year.
While vacancy in downtown has decreased since its high point of the recession when it hit 16.5%, it still lags other areas. At the end of October, it reached 13.3%, its highest since the recession, according to CoStar data.
“Since the recession, we have seen improvements, but not as much as would be expected,” Morin said. “There is a combination of perception and reality issues that contribute to issues downtown.”
Those issues include a lack of new, Class A office space. According to Yardi Matrix data, only two new office buildings — CityScape and the Freeport-
McMoran building — came online in downtown Phoenix during the decade since the recession. Block 23, where downtown’s first supermarket, a Fry’s Food Store, recently opened, is scheduled to open its office component by the end of the year, adding 230,000 square feet of space downtown.
Most downtown leases are small, less than 5,000 square feet, Morin said. Companies that have plans to hire hundreds of people have opted toward suburban campuses in places such as Chandler and Gilbert, which is often closer to single-
family residences where employees are likely to live. Suburbs with new buildings can offer expansive space for major leases, like New York-based accounting and professional services firm Deloitte, which now leases about 200,000 square feet in Gilbert.
Morin said tenants also may be turned off to downtown over worries there is not enough parking or that the area’s traffic congestion is heavy. The city of Phoenix has tried to quell issues around parking by allowing some large downtown tenants, including Quicken Loans and WeWork, to use underused city-owned garages.
Read more: Renovations seek to make old downtown buildings just like new
The question is how much the new office space coming online will impact tenant decisions to land downtown. Ryan Timpani, executive vice president at Colliers International in Phoenix, is in charge of leasing the office portion of Block 23 and has secured two tenants: WeWork and Ernst & Young, which will move from Renaissance Square into Block 23.
“The [Fry’s] grocery store downtown is a landmark change,” Timpani said. “Most [metropolitan statistical areas] we compete against have grocers in their downtown.”
Block 23’s office design shows the difference between what tenants wanted in the past and what they look for now, Timpani said.
“Previously, companies wanted the most cost-effective building,” he said. “Now, it’s all about the amenities. For companies, employee retention is paramount.”
With more multifamily coming to downtown, more people who work in the area will be able to live within walking distance of their jobs.
“Now, downtown Phoenix can get just as dense as any submarket,” he said. “The word is getting out on how easy it is to hire in downtown Phoenix.”
Gradually, the mentality around downtown Phoenix may be shifting, Timpani said. Lately, Tempe has received most of the new-to-market companies. But, more often than not, companies are including downtown Phoenix sites in their tours.
Block 23 is actively courting numerous other tenants that have the potential to take up the remaining office space, Timpani said. The area can be attractive for employers because of its central location from both of the area’s largest employee pools, the southeast and northwest sides of the Valley.
With new office buildings coming online soon, older buildings will have to be updated in order to keep their tenants, he said.
Darius Green, a broker with Keyser, agrees that Block 23 is setting the bar. Green represents tenants seeking office space around the Valley, including many downtown tenants.
“Downtown is coming into its own finally,” Green said. “It’s becoming a live-work-play environment. Amenities are the key. If you’re going to work in downtown Phoenix, the access to amenities there. Block 23 is the biggest amenity of all time with the Fry’s for people who live and work in downtown.”
And, there is a price premium on office space in downtown. Green said users downtown can expect to pay between $30 and $35 per square foot for Class A office space, compared with about $26 on average in the Valley.
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Source: https://www.bizjournals.com/phoenix/...e-leasing.html
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