Chandler, Tempe are hot spots in the Valley for office space

The Republic | azcentral.com
Luci Scott

Activity is picking up in the office market, with parts of Chandler and Tempe becoming the Valley’s hottest spots for construction and demand for space.

Mesa and Gilbert aren’t far behind, experts say.

The Valley’s overall office vacancy rate is just under 24 percent — down from 26 percent in recessionary 2010. The vacancy rate in the Southeast Valley is 18.8 percent, the lowest vacancy rate in all of metro Phoenix, according to commercial brokerage CBRE.

“Chandler and Tempe are probably the two brightest spots in metro Phoenix,” said Bryan Taute, senior vice president of the CBRE’s office-market team in Phoenix.

More buildings will soon come out of the ground in the Southeast Valley, Taute predicted. He said other developers are either trying to buy land, acquire land or are designing buildings. New construction in the Southeast Valley is largely a result of large areas of quality space.

“Even though the vacancy in metropolitan Phoenix is under 24 percent, it’s mostly made up of small blocks of Class B and Class C space,” Taute said. “For that reason, users are looking for higher-quality space, and therefore we’ve seen a surge in build-to-suit activity.”

Overall, office vacancies in the Chandler submarket — Loop 101, the Price Road Corridor and Chandler Fashion Center — stand at 15 percent, down from about 34 percent at the depth of the recession, Taute said.

Class A space in Chandler is considerably tighter, hovering around 4 percent, said Christine Mackay, the city’s director of economic development.

“Office vacancies have righted in Chandler to the point where it’s very challenging for us to submit for those large office projects,” she said. “Most often they want existing space. … Several developers are in the hunt to get some spec office space out of the ground.”

Demand in Tempe is comparable.

“We’ve seen the vacancy rate has declined significantly in the Tempe submarket, down to 10.63 percent as of the second quarter of 2013,” Taute said. That submarket is the Tempe Town Lake and Mill Avenue area, where vacancies in Class A offices, the highest-rated spots, are even tighter at 5.1 percent.

In Gilbert, office vacancies are at 25 percent, which is higher than optimum. But that is expected to change now that several big new projects that were on hold have been revived and built, said Kelly Patton, economic-development manager for the Gilbert Office of Economic Development.

In 2012, Gilbert’s rate was 24.6 percent.

“The first two quarters of 2013, (the vacancy) has increased slightly, but we attribute that to brand new office space that just came on the market,” Patton said.

In Tempe, the Town Lake submarket is popular because it’s close to Phoenix Sky Harbor International Airport, freeways, light rail, Arizona State University and amenities such as restaurants. “We’ve seen a lot of technology companies as well as other companies like that central, urban location,” Taute said.

The activity includes the big new project by State Farm, other employers’ expansions and the fact that several developers are poised to break ground, including Phase 3 of Hayden Ferry. That development was designed years ago but shelved when the economy tanked; now it’s being revived with some redesign.

Liberty Property Trust is expected to break ground this year as well on an office project on the northwestern corner of Priest Drive and Rio Salado Parkway.

The success of the Chandler submarket, where the vacancy rate for Class A is a minuscule 2.5 percent, is epitomized by Allred Park Place, a mixed-use business park where construction has begun on the sixth speculative Class A office building east of the Price Road/Willis Road intersection.

An earlier structure was under construction when it was snapped up by a tenant, software developer Infusionsoft, which has since taken a second building in the park.

Kurt Sullivan, vice president of property management for San Diego-based Douglas Allred Co., is optimistic that the newest structure will fill up quickly. “It’s a terrific location,” he said. “I remember when I first saw it and saw all of the agricultural land, it was attractive if you had a forward-looking view.”

The company is so bullish on the area, it has purchased other parcels in the area. “Our development will continue as we see the marking showing demand,” Sullivan said.

Go Daddy has a 150,000-square-foot building under construction in the ASU Research Park. The GM innovation center at Loops 101 and 202 in Chandler is under way. A built-to-suit structure has been completed in the Cotton Center.

Gilbert’s vacancy rate is high because of the opening of the Forum, a retail and office project of 63,000 square feet on the northwestern corner of Williams Field and Val Vista roads.

Some tenants are already committed to that location. The retail spaces were finished before the recession, but the office portion remained uncompleted through the recession. The original developer fell out and a new developer is finishing the project.

Two more office projects are under design in Gilbert. One project, Rivulon by Nationwide Realty Investors, will be 125,000 square feet near Gilbert Road and Loop 202. Eventually, 3.3 million square feet of office will be built by Nationwide on a square mile of land there.

“That location will double Gilbert’s existing office space as it stands today,” Patton said. Another Gilbert project, the Reserve at Santan developed by Orsett, is at the southeastern corner of Gilbert and Germann roads.

“We’re definitely seeing some momentum,” Patton said. “We have a lot of inquiries, especially now that summer is coming to a close and everybody seems to be getting back to business. We have been very busy in the past couple of weeks in particular, and hopefully we’ll see that going at least to the end of the year and beyond. The momentum has definitely turned.”

In Mesa, the second-quarter rate of total office space was 17.8 percent, compared with 20.2 percent at the same time a year ago and 20.5 percent in 2010, according to Bill Jabjiniak, the city’s director of the Office of Economic Development.

“Office activity in Mesa is picking up,” Jabjiniak said in an e-mail. Two good examples, he said, include esurance’s 32,000 square feet in the Fiesta District and Edupoint’s move into 33,500 square feet at Val Vista and U.S. 60.

“Another good example is Riverview Point, which basically sat empty for several years,” he added. “It’s now about 75 percent full.”

Among Class A projects in the works are Phase II Riverview Point in Mesa Riverview, and the Mesa Gateway 202 Business Park, which is seeking tenants before beginning construction.

The optimum rate varies greatly among cities across the country, CBRE’s Taute said, but it’s somewhere between 10 and 15 percent. “In Phoenix, 12 to 15 percent is typical,” he said.

Submarkets doing less well include south Tempe and Ahwatukee, with a vacancy rate of 30 percent, although that’s an improvement from 37 percent in 2011, Taute said.

The Gilbert submarket of Phoenix-Mesa Gateway Airport and Loop 202 lacks much activity, as does Mesa’s Superstition Corridor along U.S. 60, with its vacancy rate of 27 percent.

Downtown Mesa, with 380,000 square feet in 11 buildings, has a 21 percent vacancy rate, Taute said.

“It’s so small we don’t talk about it a whole lot,” he said. “It has a 21 percent vacancy; at the height, it was 22 percent. It hasn’t done much.”

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