Q32017

PHOENIX METRO OFFICE

MARKETREPORT

Q3 2017 Top Office Sales

Q3 2017 Phoenix Office Market Overview

Q3 2017 Top Office Leases

Office Market Continues To Grow, Despite Slower Absorption

Total Sales

$411.1MQ2 2017: $535.4M

No. of Transactions

98 Q2 2017: 125

Average PSF

$157.34 Q2 2017: $167.99

Average Cap Rate

7.99%Q2 2017: 7.19%

Sales by the Numbers: Q3 2017

Absorption/Vacancyin SF, 2007-2017

Buyer TypeQ3 2017 Sales

Rental Ratesper month, 2007-2017

Economic Indicatorsas of Q3 2017

Source: Bureau of Labor Statistics, Bureau of Economic Analysis of the U.S. Dept. of Commerce.

Key Takeaways

• The Greater Phoenix office market saw another quarter of positive net absorption, however, the 216,037 SF of absorption was measurably slower than we have seen in recent quarters.

• Despite slower absorption, Q3 marks the 17th straight quarter of postive growth. If this continues into next quarter, it will set the record for the longest expansion ever in the Phoenix Market.

• Vacancy has begun to level off at 19.5%, which is being hindered by Class B properties with a 22.4% vacancy rate.

• Rents are still modestly increasing, particularly in Class A properties, and new construction is increasing in sought-after submarkets like Tempe and Chandler.

The Phoenix office market is continuing on its historical growth period, despite slowing down slightly in Q3. For 17 quarters in a row we have seen the office market grow. So far in 2017, over 1.3 million square feet of office space has been absorbed. If this trend continues into Q4, this cycle will

set the record for the longest period of expansion the Phoenix market has ever seen.

This quarter has been highlighted by larger sized transactions from well credited tenants. Some of these executed leases include: MUFG Union Bank for 173,055 SF in Tempe, Consumer Cellular for 163,607 SF in Deer Valley, and Liberty Mutual Insurance for 130,488 SF in Chandler. These are a good sign for the market, despite having to wait until the leases commence in 2018 for it to reflect in the market data.

Class A properties continue to see sustained success, while their Class B counterparts are still lagging behind. Between the two classes of buildings, there is a 6.3% spread between vacancy rates, and a $6.07 difference between asking rents. For Class A space, vacancy is down to 16.1% and asking rents are up to $28.50. On the other hand, Class B space is at a 22.4% vacancy and asking rents are still low at $22.43. In response to this, Class B properties are being renovated and attracting strong tenants. Sublease space in the Phoenix office market has also affected market conditions in Q3. With over 2.5 million square feet of

sublease space available at discounted rates, direct leased space has felt the effects. Approximately 2.5% of Phoenix’s office inventory is either vacant or occupied sublease space, leading to tenants trading up to Class A properties at Class B rates.

The success of Class A properties in sought after submarkets is also driving demand for new construction. Tempe and Chandler are leading the way with new office developments breaking ground this quarter including: The Offices at Chandler Viridian and The Grand, Phase II. Chandler Viridian has already signed a 55,000 square foot lease with new anchor tenant, Stantec Inc. These developments represent an additional 738,500 square feet of new construction, bringing the total to over 2 million square feet being built in the Phoenix Market. No substaintial new construction was delivered in Q3, however Q4 should welcome 371,000 square feet of new product in Central Scottsdale and 120,000 square feet in Chandler.

Depsite slower absorption in Q3, the Phoenix Metro continues to add thousands of jobs from companies attracted to the city’s highly educated workforce, low cost of living, and business-friendly environment.

Unemployment U.S. Steady at 4.4% Arizona Up to 5.0% Phoenix Metro Up to 4.4%

Consumer Price Index Up 0.4%U.S. GDP Up 2.6%

Property Address Buyer Seller Class Sales Price SF PSF5310-5455 E. High St. Harbert Management Corporation Wayzata Investment Partners A $129,500,000 642,803 $201.461201 S. Alma School Rd. Barker Pacific Group Wilson Property Services, Inc. A $23,000,000 306,571 $75.027001 N. Scottsdale Rd. EverWest Real Estate Partners JB Matteson A $22,400,000 91,942 $243.638377 E. Hartford Dr. The Roxborough Group Troon Management Co. A $20,650,000 106,000 $194.8119820 N. 7th St. Globe Corporation Cavan B $11,800,000 77,037 $153.17

2005 4.42 14.1%

06 4.07 11.8%

07 1.01 15.3%

08 -0.77 21.1%

09 -0.76 23.7%

10 -0.48 25.2%

11 0.41 25.3%

12 1.94 23.3%

13 1.46 22.0%

14 2.00 20.9%

15 1.91 20.5%

16 1.2 20.0%

YTD 17 1.31 19.5%

06 $24.1407 $25.7208 $25.4809 $22.8210 $21.0911 $20.2412 $19.7213 $20.1614 $21.1215 $22.4816 $23.86 User 5%

YTD 17 $24.71 Public/REIT 20%Private 45%Private Equity 9%Institutional 20%

2005 $0.572006 $0.642007 $0.662008 $0.622009 $0.542010 $0.492011 $0.482012 $0.502013 $0.522014 $0.522015 $0.54

15.3%

21.1%

25.3% 22%

20.5%

19.5%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

07 08 09 10 11 12 13 14 15 16 YTD17

Absorption Vacancy

$25.72

$22.82

$20.24

$19.72

$21.12

$23.86

$24.71

$18.00

$20.00

$22.00

$24.00

$26.00

$28.00

$30.00

07 08 09 10 11 12 13 14 15 16 YTD 17

Full Service Asking Rental Rates

5%

20%

45%

9%

20% User

Public/REIT

Private

Private Equity

Institutional

2005 4.42 14.1%

06 4.07 11.8%

07 1.01 15.3%

08 -0.77 21.1%

09 -0.76 23.7%

10 -0.48 25.2%

11 0.41 25.3%

12 1.94 23.3%

13 1.46 22.0%

14 2.00 20.9%

15 1.91 20.5%

16 1.2 20.0%

YTD 17 1.31 19.5%

06 $24.1407 $25.7208 $25.4809 $22.8210 $21.0911 $20.2412 $19.7213 $20.1614 $21.1215 $22.4816 $23.86 User 5%

YTD 17 $24.71 Public/REIT 20%Private 45%Private Equity 9%Institutional 20%

2005 $0.572006 $0.642007 $0.662008 $0.622009 $0.542010 $0.492011 $0.482012 $0.502013 $0.522014 $0.522015 $0.54

15.3%

21.1%

25.3% 22%

20.5%

19.5%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

07 08 09 10 11 12 13 14 15 16 YTD17

Absorption Vacancy

$25.72

$22.82

$20.24

$19.72

$21.12

$23.86

$24.71

$18.00

$20.00

$22.00

$24.00

$26.00

$28.00

$30.00

07 08 09 10 11 12 13 14 15 16 YTD17

Full Service Asking Rental Rates

5%

20%

45%

9%

20%

User Public/REITPrivate Private EquityInstitutional

2005 4.42 14.1%

06 4.07 11.8%

07 1.01 15.3%

08 -0.77 21.1%

09 -0.76 23.7%

10 -0.48 25.2%

11 0.41 25.3%

12 1.94 23.3%

13 1.46 22.0%

14 2.00 20.9%

15 1.91 20.5%

16 1.2 20.0%

YTD 17 1.31 19.5%

06 $24.1407 $25.7208 $25.4809 $22.8210 $21.0911 $20.2412 $19.7213 $20.1614 $21.1215 $22.4816 $23.86 User 5%

YTD 17 $24.71 Public/REIT 20%Private 45%Private Equity 9%Institutional 20%

2005 $0.572006 $0.642007 $0.662008 $0.622009 $0.542010 $0.492011 $0.482012 $0.502013 $0.522014 $0.522015 $0.54

15.3%

21.1%

25.3% 22%

20.5%

19.5%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

07 08 09 10 11 12 13 14 15 16 YTD17

Absorption Vacancy

$25.72

$22.82

$20.24

$19.72

$21.12

$23.86

$24.71

$18.00

$20.00

$22.00

$24.00

$26.00

$28.00

$30.00

07 08 09 10 11 12 13 14 15 16 YTD17

Full Service Asking Rental Rates

5%

20%

45%

9%

20%

User Public/REITPrivate Private EquityInstitutional

Tenant Name Property Name Address Class Submarket SF TypeMUFG Union Bank The Grand at Papago Center 1101 W. Washington St. A Tempe 173,055 NewConsumer Cellular I-17 Office Center 17500 N. Black Canyon Hwy. B Deer Valley 163,607 NewLiberty Mutual Insurance Chandler Airport Center 2222-2290 E. Yeager Dr. (2) A Chandler 130,488 NewWells Fargo Continuum Business & Technology Park 2501 S. Price Rd. B Chandler 81,896 NewStantec Inc. The Offices at Chandler Viridian 3111 W. Frye Rd. A Chandler 55,000 New

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Phoenix Office Submarket Map

1. Downtown Phoenix

2. Midtown Phoenix

3. East Phoenix

4. 44th St. Corridor

5. Camelback Corridor

6. Piestewa Corridor

7. Northwest Phoenix

8. Southwest Phoenix

9. Airport Area

10. S. Tempe/Ahwatukee

11. Tempe

12. Scottsdale South

13. Central Scottsdale

14. Paradise Valley

15. Deer Valley Airport

16. Arrowhead

17. Glendale

18. Chandler

19. Gateway/Loop 202

20. Superstition Corridor

21. Mesa Downtown

22. Mesa East

23. Scottsdale Airpark

24. N. Scottsdale/Carefree

25. N. Phoenix/Cave Creek

26. North I-17

27. Loop 303/Surprise

28. West I-10

Q3 2017 Phoenix Office Market Stats

Inventory Under AskingTotal Direct SF Percent Sublease SF Percent Total SF Percent Q3 2017 YTD 2017 Vacant SF Total SF Percent Construction FS Rents

1. Downtown Phoenix 7,574,892 1,090,931 13.6% 97,762 1.2% 1,188,693 14.8% (13,428) (9,737) 97,762 161,431 2.0% 220,000 $30.22

2. Midtown Phoenix 9,287,439 2,430,032 26.2% 33,200 0.4% 2,463,232 26.5% (22,831) (41,612) 33,200 102,937 1.1% - $21.92

3. Midtown/Central Phoenix 1,962,350 253,723 12.9% 2,365 0.1% 256,088 13.1% 6,375 7,161 2,365 23,726 1.2% - $16.84

4. 44th St. Corridor 2,506,732 569,681 22.7% 2,100 0.1% 571,781 22.8% (49,681) (44,717) 2,100 10,369 0.4% - $25.22

5. Camelback Corridor 7,439,262 1,398,946 18.8% 103,095 1.4% 1,502,041 20.2% 15,035 50,822 103,095 191,846 2.6% 118,090 $30.40

6. Piestewa Corridor 2,263,475 463,090 20.5% 3,975 0.2% 467,065 20.6% 2,559 15,333 3,975 3,975 0.2% - $20.67

7. Northwest Phoenix 6,213,251 1,605,895 25.2% 652 0.0% 1,606,547 25.2% 98,916 44,272 652 169,572 2.7% - $18.92

8. Southwest Phoenix 1,300,561 232,071 17.8% - 0.0% 232,071 17.8% - 8,367 - - 0.0% - $22.92

9. Sky Harbor Airport 8,121,649 1,846,109 22.7% 590,849 7.3% 2,436,958 30.0% 210 16,860 590,849 605,339 7.5% 235,000 $23.40

10. S. Tempe/Ahwatukee 4,892,292 629,106 12.9% 17,138 0.4% 646,244 13.2% 35,622 177,051 17,138 105,558 2.2% $22.61

11. Tempe 5,955,249 856,494 14.4% 48,999 0.8% 905,493 15.2% 7,025 62,374 48,999 114,455 1.9% 741,876 $28.81

12. Scottsdale South 4,570,473 709,870 15.5% 67,597 1.5% 777,467 17.0% (59,936) (83,591) 67,597 89,126 2.0% - $30.35

13. Central Scottsdale 5,177,820 505,294 9.8% 51,554 1.0% 556,848 10.8% 103,820 197,933 51,554 84,263 1.6% 371,000 $25.54

14. Paradise Valley 2,112,880 348,398 16.5% 6,127 0.3% 354,525 16.8% 32,102 25,356 6,127 23,536 1.1% - $24.87

15. Deer Valley Airport 6,245,024 1,516,877 20.9% - 0.0% 1,516,877 20.9% (50,484) 175,569 - 136,926 1.9% - $22.99

16. Arrowhead 1,007,641 94,339 9.4% - 0.0% 94,339 9.4% 4,298 27,951 - - 0.0% - $22.42

17. Glendale 1,687,126 378,697 22.4% - 0.0% 378,697 22.4% 59,671 30,058 - - 0.0% - $21.97

18. Chandler 5,543,765 1,260,851 22.7% 34,372 0.6% 1,295,223 23.4% 33,445 538,067 34,372 300,269 5.4% 403,130 $24.24

19. Gateway/Loop 202 342,363 52,614 15.4% 2,980 0.9% 55,594 16.2% - (28,860) 2,980 8,080 2.4% - $22.67

20. Superstition Corridor 2,682,133 442,619 16.5% 15,617 0.6% 458,236 17.1% 52,885 118,208 15,617 37,893 1.4% - $19.58

21. Mesa Downtown 607,661 50,925 8.4% - 0.0% 50,925 8.4% 4,223 10,575 - 8,832 1.5% - $15.29

22. Mesa East 526,558 72,836 13.8% - 0.0% 72,836 13.8% 18,610 17,564 - - 0.0% - $16.49

23. Scottsdale Airpark 8,935,346 1,213,768 13.5% 96,777 1.1% 1,310,545 14.6% (55,305) 35,622 96,777 355,162 4.0% - $27.17

24. N. Scottsdale/Carefree 644,679 187,821 29.1% - 0.0% 187,821 29.1% 2,463 975 - 0 0.0% - $20.97

25. N. Phoenix/Cave Creek 13,607 - 0.0% - 0.0% - 0.0% - - - - 0.0% - $12.00

26. North I-17 277,665 86,470 31.1% - 0.0% 86,470 31.1% (10,083) (6,746) - - 0.0% - $24.60

27. Loop 303/Surprise 352,666 72,517 20.6% 6,178 1.8% 78,695 22.3% 1,322 4,731 6,178 6,178 1.8% - $22.68

28. West I-10 822,473 128,000 15.6% - 0.0% 128,000 15.6% (796) (37,067) - - 0.0% - $19.17

Phoenix Metro Total 99,067,032 18,497,974 18.4% 1,181,337 1.2% 19,679,311 19.6% 216,037 1,312,519 1,181,337 2,539,473 2.6% 2,089,096 $24.71

By Building Type

Class A 38,710,426 6,014,316 15.2% 354,221 0.9% 6,368,537 16.1% 182,054 732,769 354,221 1,153,284 2.9% 2,089,096 $28.50

Class B 54,419,338 11,513,902 20.9% 823,664 1.5% 12,337,566 22.4% 34,623 570,896 823,664 1,370,737 2.5% - $22.43

Class C 5,937,268 969,756 16.3% 3,452 0.1% 973,208 16.4% (640) 8,854 3,452 15,452 0.3% - $16.80

Building Type Total 99,067,032 18,497,974 18.4% 1,181,337 1.2% 19,679,311 19.6% 216,037 1,312,519 1,181,337 2,539,473 2.6% 2,089,096 $24.71

* When innaccurate or newly updated information is discovered, it is incorporated into current reporting which may negate comparison to previously published market reports.* Net absorption is calculated by the net change in physically occupied space between the current period and the previous period based on our competitive building inventory.* Due to multiple factors in office space use, Lee & Associates Arizona has adjusted its' inventory base in Q3 2017 to reflect the most accurate market data.

Office Submarkets Vacancy Rate Net Absorption Sublease Available

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The information contained herein has been obtained from third-party sources believed to be reliable; however, Lee & Associates Arizona has not independently verified its accuracy. Lee & Associates makes no representations, guarantees, or express or implied warranties of any kind regarding the accuracy or completeness of the information and details provided herein, including but not limited to the implied warranty of suitability and fitness for a particular purpose.

Interested parties should perform their own due diligence regarding the accuracy of the information. The information provided herein, including any sale or lease terms, is being provided subject to errors, omissions, changes of price or conditions, prior sale or lease, and withdrawal without notice by third-party data source providers.

The Phoenix Office Market Report compiles relevant market data by using a third-party database for the proprietary analysis of specific office properties above 10,000 SF in the Phoenix Metropolitan Area.

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Market report analysis by: Lee & Associates Arizona

About This Report

Q32017