Vacancy Inches Higher, Despite Continued Absorption

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1 Research & Forecast Report GREATER PHOENIX OFFICE 1Q 2017 Vacancy Inches Higher, Despite Continued Absorption Key Takeaways > > Improving conditions in the Greater Phoenix office market took a pause in the first quarter of Although net absorption was positive totaling 831,000 square feet vacancy ticked up slightly in response to heightened development activity. > > Vacancy in the Greater Phoenix office market ended the first quarter at 16.5 percent, 30 basis points higher than at the end of This marked the first quarterly vacancy increase in more than a year. Despite the recent uptick, vacancy in Greater Phoenix is 70 basis points lower than one year ago. > > Rental rates are rising at a consistent pace, reaching $23.76 per square foot in the first quarter. Rents have ticked higher in each of the past four years. Rates are growing at a modest rate, gaining 4.5 percent from one year earlier. > > The investment sales market slowed modestly in the first quarter of the year. The median price per square foot dipped, but cap rates were essentially unchanged, suggesting that the fall in prices was largely the result of properties changing hands, rather than a change in market sentiment. Greater Phoenix Office Market The Greater Phoenix office market got off to a slower start to 2017 than it has in recent years. Vacancy inched higher in the first quarter, marking only the fifth time in the past 20 quarters where the rate has increased. This is likely a short-term disruption in the market s improvement cycle and not a change of direction of the market as a whole. Employers continue to add workers and businesses continue to set up new operations in Greater Phoenix, supporting tenant demand for office space. Net absorption was positive, even as the vacancy rate inched higher. While tenant demand for space was healthy, the delivery of new supply accelerated in the first quarter. Additions to inventory Market Indicators Relative to prior period Vacancy Net Absorption Construction Rental Rate First Quarter Employment Trends* Total Nonfarm Phoenix Metro Office-Using Phoenix Metro Total Nonfarm United States Office-Using United States *Source: Bureau of Labor Statistics Summary Statistics Phoenix Market Phoenix Class A Phoenix Class B Vacancy Rate 16.5% 14.8% 17.7% Change from 1Q 2016 (bps) Net Absorption (thousands SF) New Construction (thousands SF) Under Construction (thousands SF) Asking Rents Per Square Foot Per Year Market Q Market Q $23.76 $28.12 $22.09 Change from 1Q % 3.8% 5.1%

2 Greater Phoenix Office Market (continued) topped 1.2 million square feet in the first few months of the year, highlighted by the delivery of the final building of State Farm s 2.1-million square foot region headquarters in Tempe. The Tempe submarket, which has featured one of the lowest vacancy rates in the Greater Phoenix region for the past several years, is leading the way in new development. More than 300,000 square feet of new spec office space was delivered in Tempe in the first quarter and additional projects are likely to begin construction before year end. Consistency was the prevailing theme in the investment market in 2016, and that trend continued in the first few months of this year. The median price dipped slightly in the first quarter, but cap rates were largely unchanged in the mid- to high-7 percent range. The change in prices largely was more a reflection of the mix of assets changing hands. With vacancy likely to tighten and rents forecast to continue to push higher, property prices could easily trend higher for the fifth consecutive year. Recent Transactions in the Market OFFICE SALE ACTIVITY Property Address Submarket Sale Date Sale Price Size SF Sale Price SF Class 3101 & 3111 N Central Ave., Phoenix Downtown North 2/21 $26,000, ,693 $92 B 2777 E Camelback Rd., Phoenix Camelback Corridor 3/2 $24,560, ,531 $235 A OFFICE LEASE ACTIVITY Building Name/Address Submarket Lease Type Tenant Size SF Class 1500 N Priest Dr., Tempe Tempe Move in Endurance International Group 71,618 A 2600 N Central Ave., Phoenix Downtown North Move in CMOC International 16,299 B Historical Absorption, Deliveries and Vacancy Rates 7,500,000 24% 6,000,000 21% 4,500,000 18% Square Feet 3,000,000 1,500,000 15% 12% 9% Vacancy - 6% (1,500,000) 3% (3,000,000) 0% * Forecast Net Absorption Deliveries Vacancy 2 Greater Phoenix Research & Forecast Report 1Q 2017 Office Colliers International

3 Vacancy: > > Vacancy in the Greater Phoenix office market ended the first quarter at 16.5 percent, a 30 basis point uptick from the figure at the close of Even after the vacancy rise at the start of 2017, the rate is still 70 basis points lower than one year ago. Vacancy by Property Class 26% 24% > > Vacancy in the South Scottsdale submarket rose substantially in the first quarter of The rates ticked up to 16.8 percent, which is 490 basis points higher than vacancy rates one year earlier. > > The Tempe submarket has experienced a very healthy decline in vacancy, finishing the first quarter at 9.3 percent, 500 basis points lower than the first quarter of last year. Vacancy rates in this submarket are still significantly below the five-year average vacancy rate of 11.5 percent. Vacancy 22% 20% 18% 16% 14% 12% 10% > > Forecast: Vacancy is forecast to end 2017 at 15.2 percent, down 100 basis points for the year. In 2016, vacancy fell 90 basis points and the rate has been declining since peaking in Class A Class B Class C Absorption and Leasing Activity: > > Net absorption in the Greater Phoenix office market totaled approximately 830,000 square feet for the first quarter of This is a continuation of recent trends, as net absorption averaged approximately 800,000 square feet per quarter in This is the eighth quarter in a row that there has been positive net absorption. Vacancy Among Major Submarkets 30% 1Q Q 2016 > > A few submarkets accounted for the bulk of the net absorption in the first quarter. The Airport Area submarket experienced a positive net absorption of 198,000 square feet. Nearly 70 percent of that total is made up of two large leases that were signed in spec projects. > > Leasing activity slowed during the first quarter, particularly in transactions over 20,000 square feet. Transaction activity was very consistent from quarter-to-quarter in Vacancy 25% 20% 15% 10% 5% 0% > > Forecast: Net absorption will total approximately 3 million square feet in 2017, closely tracking annual totals from Steady employment growth will fuel net absorption. Rental Rates: > > Asking rents are rising at a modest rate, reaching an average asking price of $23.76 per square foot in the first quarter. This is the sixteenth consecutive quarter where rents have advanced in the Greater Phoenix office market. Rents rose 4.5 percent from the first quarter of last year. Asking Rent Trends > > Asking rental rates increased across all property classes. Asking rents in Class A buildings reached $28.12 per square foot, an uptick of 3.8 percent from the previous year. Class B buildings also saw growth in rental rates, with Class B rates averaging $22.09, about a 5 percent increase from Average Asking Rent (per SF) $29 $28 $27 $26 $25 $24 $23 $22 $21 $20 $19 $18 1Q Q Q Q Q Q Q 2017 Class A Market Average 3 Greater Phoenix Research & Forecast Report 1Q 2017 Office Colliers International

4 Rental Rates (continued): > > The Scottsdale Airpark submarket is recording strong rental growth throughout all segments. The average asking rent in this submarket is up to $27.17 per square foot, a year over year increase of 5.4 percent. Within this submarket, Class A buildings experienced the most robust rent growth. Class A buildings in the Scottsdale Airpark are averaging $29.15 a square foot, a 5.6 percent increase from a year ago. > > Forecast: Rents will continue to trend higher, particularly as vacancy tightens. Asking rents are forecast to gain approximately 5 percent in 2017, building on an increase of 6 percent in Construction: > > Office construction was active to start 2017, with more than 1.2 million square feet of new space coming online in the first quarter. This more than doubled the additions to inventory from the fourth quarter of last year. > > Currently, approximately 920,000 square feet of office space is under construction. There are several projects that are in the development pipeline that are not yet under construction. These projects could break ground in the coming quarters if minimum pre-leasing thresholds are met. > > Build-to-suit projects have accounted for the bulk of the new development to this point in the cycle. Prominent projects that delivered in the first quarter included the 443,000-square foot final building of State Farm s Marina Heights campus and a 150,000-square foot project for Farmer s Insurance. A 135,500-square foot project for McKesson is under way and scheduled for delivery in early > > Forecast: After a surge of development activity in the past two years, construction will slow in Projects totaling approximately 2 million square feet will be delivered this year, down from more than 2.3 million square feet in Investment Trends: > > Sales of office buildings slowed in the first quarter of 2017, dipping approximately 10 percent from the fourth quarter of last year. Transaction activity in the first quarter was down 23 percent from one year earlier. > > Prices retreated a bit in the first quarter, following healthy gains from The median price reached $136 per square foot, 9 percent lower than the median price in the fourth quarter of last year. This figure is only 4 percent lower than the overall 2016 median price. > > Cap rates averaged in the mid- to high-7 percent range in the first quarter. This is slightly up from the fourth quarter cap rate, and in-line with the 2016 average cap rate. The Federal Reserve raised interest rates during the first quarter, which could put some upward pressure on cap rates in the coming quarters. Employment Overview Year-over-Year Employment Change Median Price per SF Total Employment Office-Using Employment 8% 6% 4% 2% 0% -2% -4% -6% -8% Construction Trends by Submarket Square Feet Completions Since 2016 Under Construction 2,250,000 2,000,000 1,750,000 1,500,000 1,250,000 1,000, , , ,000 0 Airport Area Chandler Deer Valley Airport Scottsdale South Tempe Investment Trends $175 $150 $125 $100 $75 Sales Price Cap Rate 10% 9% 8% 6% $50 5% $25 $0 4% YTD 17 7% Average Cap Rate 4 Greater Phoenix Research & Forecast Report 1Q 2017 Office Colliers International

5 Office Market EXISTING PROPERTIES DIRECT VACANCY SUBLEASE VACANCY TOTAL VACANCY NET ABSORPTION - SF NEW SUPPLY - SF UNDER CONSTR AVG. RENT TOTAL CLASS BLDGS. INVENTORY SF SF RATE SF RATE SF Q1-17 Q1-16 YTD YTD SF RATE (FS) CENTRAL BUSINESS DISTRICT Downtown North A 14 4,575,999 1,077, % 39, % 1,116, % 23.3% (70,674) (70,674) - - $24.47 B 91 6,486,714 1,420, % 20, % 1,441, % 20.6% (22,889) (22,889) ,174 $20.04 C , , % 1, % 167, % 19.1% 5,354 5, $16.18 Total ,029,454 2,665, % 60, % 2,725, % 21.5% (88,209) (88,209) ,174 $21.66 Downtown South A 11 4,891, , % 109, % 763, % 16.3% (2,218) (2,218) - - $30.02 B 28 3,244, , % - 0.0% 412, % 9.9% 48,693 48, $27.98 C , , % - 0.0% 132, % 14.8% 3,350 3, $13.76 Total 63 9,113,465 1,199, % 109, % 1,308, % 13.9% 49,825 49, $28.73 SUBURBAN 44th St. Corridor A 13 1,715, , % - 0.0% 360, % 13.3% (29,777) (29,777) $26.44 B 36 1,625, , % - 0.0% 182, % 12.6% 13,034 13, $22.96 C ,241 17, % - 0.0% 17, % 6.5% (500) (500) $13.61 Total 64 3,687, , % - 0.0% 560, % 12.3% (17,243) (17,243) $24.74 Airport Area A 15 2,032, , % - 0.0% 460, % 23.5% 157, , ,000 $25.77 B 128 8,189,580 1,363, % 374, % 1,738, % 18.3% 36,475 36, ,889 $22.96 C ,592 51, % - 0.0% 51, % 11.0% 4,798 4, $13.99 Total ,735,912 1,875, % 374, % 2,249, % 18.9% 198, , ,889 $23.39 Arrowhead A 1 80, % 1, % 1, % 0.0% (1,500) (1,500) ,503 $26.88 B 95 2,369, , % 1, % 318, % 14.3% (42,826) (42,826) 10,500 10,500 - $24.57 C ,314 64, % - 0.0% 64, % 19.8% (1,844) (1,844) $21.35 Total 109 2,702, , % 3, % 384, % 14.4% (46,170) (46,170) 10,500 10, ,503 $24.04 Camelback Corridor A 25 4,652, , % 54, % 954, % 21.3% (21,367) (21,367) $33.30 B 77 3,406, , % 24, % 602, % 17.9% (33,454) (33,454) $23.16 C ,735 25, % - 0.0% 25, % 16.8% (2,958) (2,958) $15.40 Total 123 8,431,172 1,503, % 78, % 1,582, % 19.8% (57,779) (57,779) $29.43 Chandler A 19 2,509, , % 2, % 277, % 19.0% 93,479 93, ,242 $27.05 B 137 5,581,519 1,331, % 60, % 1,392, % 22.6% 5,902 5, , ,785 - $23.80 C ,374 31, % - 0.0% 31, % 14.9% (366) (366) $16.49 Total 169 8,305,103 1,637, % 63, % 1,701, % 21.2% 99,015 99, , ,785 32,242 $24.33 Deer Valley Airport A 24 4,022, , % - 0.0% 262, % 5.4% 192, , , ,000 - $25.92 B 107 6,895,664 1,456, % 5, % 1,462, % 22.2% (51,388) (51,388) - - $21.69 C ,400 38, % - 0.0% 38, % 16.1% $18.92 Total ,105,131 1,757, % 5, % 1,763, % 16.3% 142, , , ,000 - $22.76 Gateway Airport/Loop 202 A % - 0.0% - 0.0% 0.0% ,231 $- B 46 1,222, , % 2, % 178, % 16.9% 17,884 17, $23.75 C 2 33, % - 0.0% - 0.0% 12.7% $19.20 Total 48 1,255, , % 2, % 178, % 16.8% 17,884 17, ,231 $ Greater Phoenix Research & Forecast Report 1Q 2017 Office Colliers International

6 Office Market EXISTING PROPERTIES DIRECT VACANCY SUBLEASE VACANCY TOTAL VACANCY NET ABSORPTION - SF NEW SUPPLY - SF UNDER CONSTR AVG. RENT TOTAL CLASS BLDGS. INVENTORY SF SUBURBAN Glendale SF RATE SF RATE SF Q1-17 Q1-16 YTD YTD SF RATE (FS) A 5 521,061 72, % - 0.0% 72, % 13.6% (34,176) (34,176) $27.47 B 33 1,589, , % 17, % 383, % 26.6% 51,288 51,288 16,000 16,000 - $23.13 C ,158 40, % - 0.0% 40, % 9.7% $16.67 Total 52 2,534, , % 17, % 496, % 20.9% 17,112 17,112 16,000 16,000 - $23.95 Loop 303/Surprise B 41 1,278, , % 10, % 252, % 19.2% (18,077) (18,077) $23.97 C 4 57,399 4, % - 0.0% 4, % 3.3% (3,327) (3,327) $18.90 Total 45 1,336, , % 10, % 257, % 18.5% (21,404) (21,404) $23.87 Mesa Downtown B ,900 26, % - 0.0% 26, % 4.4% $15.92 C ,328 48, % - 0.0% 48, % 20.3% (2,195) (2,195) $15.18 Total ,228 74, % - 0.0% 74, % 8.8% (2,195) (2,195) $15.51 Mesa East B 42 1,293, , % - 0.0% 126, % 9.6% (14,248) (14,248) $17.70 C , , % - 0.0% 120, % 18.8% (27) (27) $15.36 Total 74 1,970, , % - 0.0% 247, % 12.8% (14,275) (14,275) $16.68 Midtown/Central Phoenix B 79 2,861, , % 31, % 367, % 11.9% (2,961) (2,961) $19.50 C , , % - 0.0% 104, % 16.6% (1,705) (1,705) $15.34 Total 132 3,824, , % 31, % 471, % 13.1% (4,666) (4,666) $18.82 Northwest Phoenix A 10 1,295, , % - 0.0% 319, % 11.0% (36,587) (36,587) $21.75 B 116 4,968,185 1,447, % 1, % 1,448, % 26.0% (60,962) (60,962) $17.88 C 102 2,169, , % - 0.0% 390, % 20.7% 48,659 48, $12.57 Total 228 8,432,975 2,157, % 1, % 2,158, % 22.3% (48,890) (48,890) $17.74 Paradise Valley A 14 1,572, , % 10, % 274, % 19.2% (39,803) (39,803) $26.90 B 57 1,900, , % 14, % 201, % 12.5% 10,307 10, $21.37 C ,658 60, % - 0.0% 60, % 21.0% 3,493 3, $17.79 Total 92 3,793, , % 24, % 536, % 17.2% (26,003) (26,003) $24.17 Piestewa Peak Corridor A 3 409,370 12, % 10, % 23, % 4.1% 1,536 1, $26.46 B 44 2,172, , % - 0.0% 455, % 24.4% 20,522 20, $19.60 C ,657 16, % 1, % 18, % 5.3% 1,491 1, $19.32 Total 68 2,914, , % 12, % 497, % 19.4% 23,549 23, $20.36 Scottsdale Airpark A 57 6,597, , % 13, % 819, % 19.9% 41,070 41, $29.15 B 193 5,289, , % 53, % 550, % 12.9% 51,768 51, $23.70 C 8 124,960 8, % - 0.0% 8, % 12.6% 4,180 4, $14.07 Total ,012,086 1,311, % 67, % 1,378, % 16.7% 97,018 97, $ Greater Phoenix Research & Forecast Report 1Q 2017 Office Colliers International

7 Office Market EXISTING PROPERTIES DIRECT VACANCY SUBLEASE VACANCY TOTAL VACANCY NET ABSORPTION - SF NEW SUPPLY - SF UNDER CONSTR AVG. RENT TOTAL CLASS BLDGS. INVENTORY SF SUBURBAN Scottsdale Central SF RATE SF RATE SF Q1-17 Q1-16 YTD YTD SF RATE (FS) A 27 2,576, , % 39, % 295, % 13.9% (6,576) (6,576) $26.88 B 128 4,734, , % 14, % 757, % 17.4% (37,940) (37,940) $23.57 C 9 124, % - 0.0% % 5.8% $17.44 Total 164 7,435,609 1,000, % 53, % 1,054, % 16.0% (44,516) (44,516) $24.70 Scottsdale South A 16 2,131, , % 98, % 366, % 9.5% (53,053) (53,053) ,000 $30.25 B 76 2,672, , % 30, % 421, % 12.0% (45,270) (45,270) $27.16 C , , % 1, % 118, % 19.5% 7,817 7, $21.50 Total 127 5,389, , % 130, % 907, % 11.9% (90,506) (90,506) $28.51 South Tempe/Ahwatukee A 6 776,034 20, % - 0.0% 20, % 12.7% $25.53 B 119 5,264, , % 46, % 830, % 17.4% 14,117 14, $22.81 C ,322 34, % - 0.0% 34, % 9.5% 1,282 1, $24.63 Total 136 6,420, , % 46, % 885, % 16.3% 15,793 15, $23.09 Southwest Phoenix A 4 623, , % - 0.0% 141, % 31.2% 8,701 8, $24.85 B ,467 33, % - 0.0% 33, % 6.7% $19.40 C ,446 58, % - 0.0% 58, % 19.7% 23,707 23, $14.56 Total 44 1,983, , % - 0.0% 233, % 17.1% 32,408 32, $21.14 Superstition Corridor A 5 664, , % - 0.0% 147, % 26.1% (1,374) (1,374) $23.52 B 121 3,677, , % 29, % 545, % 16.8% 56,660 56, $18.72 C ,145 57, % - 0.0% 57, % 15.3% (925) (925) $14.33 Total 152 4,809, , % 29, % 750, % 17.9% 54,361 54, $19.67 Tempe A 26 5,815, , % 37, % 357, % 11.8% 539, , , ,055 - $32.56 B 96 4,243, , % 29, % 566, % 17.7% 54,701 54,701 99,988 99, ,540 $23.21 C ,291 94, % - 0.0% 94, % 10.3% (5,350) (5,350) $17.15 Total ,902, , % 67, % 1,018, % 14.3% 588, , , , ,540 $26.67 West I-10 B 41 1,202, , % 3, % 114, % 11.1% 1,569 1, $25.13 C ,029 73, % - 0.0% 73, % 20.1% (44,619) (44,619) $16.97 Total 54 1,465, , % 3, % 187, % 12.7% (43,050) (43,050) $20.70 GRAND TOTAL A ,464,295 6,618, % 418, % 7,036, % 16.7% 737, , , , ,976 $28.12 B 1,973 83,790,077 14,039, % 772, % 14,811, % 17.7% 52,905 52, , , ,603 $22.09 C ,268,042 1,761, % 3, % 1,765, % 16.1% 41,000 41, $16.70 Total 2, ,522, % 1,194, % 23,613, % 17.2% 831, ,204 1,223,328 1,223, ,579 $23.76 QUARTERLY TOTALS Q 2, ,522,414 22,419, % 1,194, % 23,613, % 831, ,204 1,223,328 1,223, ,579 $ Q 2, ,275,578 21,901, % 1,192, % 23,093, % 759, , $ Q 2, ,757,505 22,333, % 1,001, % 23,335, % 908, ,714 2,673,729 $ Q 2, ,280,791 22,813, % 953, % 23,767, % 968, ,950 3,149,124 $ Q 2, ,794,841 23,364, % 885, % 24,250, % 587, ,477 2,976,395 $22.74 As new, corrected or updated information is obtained, it is incorporated in both current and historical data, which may invalidate comparison to previously issued reports. 7 Greater Phoenix Research & Forecast Report 1Q 2017 Office Colliers International

8 Outlook: The Greater Phoenix office market remains in an improvement cycle, and further gains are likely in the year ahead. The market is in the later stages of the recovery cycle, however, which could lead to a few quarters of softer conditions over the next months. The first quarter of this year proved to be one of those periods where new supply outpaced net absorption causing the local vacancy rate to tick higher and the pace of rent growth to slow. Population-serving sectors will likely drive growth in the coming periods. After local population growth slowed considerably from , the pace has picked up in recent years. In 2016, the Greater Phoenix population expanded by more than 93,000 and Maricopa County posted the most robust population gain of any county in the United States. Looking ahead, the population in Greater Phoenix is forecast to grow by more than 100,000 residents annually for the next few years. Industries that will outperform in these expansion conditions include housing, education and healthcare, financial and other professional services. The local investment market is expected to remain healthy in the months ahead. To this point in the cycle, the modest increases in interest rates have been offset by strengthening property cash flows. The market is anticipating additional interest rate increases before the end of the year, which will likely spill over into the lending environment. While borrowing costs could inch higher in the coming quarters, the primary driver of investment performance in the office market will be the operating fundamentals of the office properties, which will continue to strengthen going forward. FOR MORE INFORMATION Bob Mulhern Senior Managing Director Greater Phoenix Bob.Mulhern@colliers.com Jim Keeley SIOR Founding Partner Scottsdale Office Jim.Keeley@colliers.com Pete O Neil Research Director Greater Phoenix Pete.ONeil@colliers.com Copyright 2017 Colliers International. The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report. Colliers International Greater Phoenix 2390 E. Camelback Road, Suite 100 Phoenix, AZ colliers.com/greaterphoenix 8 North American Research & Forecast Report Q Office Market Outlook Colliers International