Q2 2018 PHOENIX OFFICE REPORT
MARKET FUNDAMENTALS ANNUAL COMPARISON Q2 2018 Q2 2017 VACANCY 16.47% VACANCY 16.93% RENTAL RATES $25.43 RENTAL RATES $24.76 SF UNDER CONSTRUCTION 2.76 M SF UNDER CONSTRUCTION 1.20 M SF DELIVERED YTD 595 K SF DELIVERED YTD 1.50 M NET ABSORPTION YTD 1.38 M NET ABSORPTION YTD 1.34 M LINCOLN PROPERTY COMPANY / Q2 PHOENIX OFFICE / 1
LEASING ACTIVITY Leasing velocity has continued to ramp up throughout the 2nd Quarter as the demand for space continues to grow. The Phoenix Office Market has shown strong fundamentals in 2018 with overall vacancy rates dropping to 16.47%. This represents a 94 basis point decrease from the 2-year historical average. Additionally, for Phoenix's premier sub-markets such as Tempe, Class A vacancy rates are now 2.06% with overall Class A vacancy rates slightly above 10%. As the Phoenix Office Market closes out the first half of the year, rental rates have also continued to trend in a positive trajectory now averaging $25.43 PSF. As existing firms look to renew and out of state companies continue to relocate to the Phoenix market we can expect the up-tick in tenant demand to put downward pressure on vacancy rates, increasing overall market fundamentals. LARGEST LEASES Tenant JP Morgan Chase Bank Building Discovery Business Campus Square Feet 166,127 & 133,058 Submarket Price Corridor Tenant Freedom Financial Building Rio 2100 (Building 1) Square Feet 150,000 Submarket Tempe Tenant Health Service Holdings Building 3133 Camelback Square Feet 76,235 Submarket Camelback Corridor LINCOLN PROPERTY COMPANY / Q2 PHOENIX OFFICE / 2
LEASING TRENDS VACANCY TREND 120,000,000 105,000,000 90,000,000 75,000,000 60,000,000 45,000,000 30,000,000 15,000,000 0 16' Q2 16' Q3 16' Q4 17' Q1 17' Q2 17' Q3 17' Q4 18' Q1 18' Q2 Total Existing SF Total Available SF Vacancy % 18.50% 18.00% 17.50% 17.00% 16.50% 16.00% 15.50% "Market conditions continue to improve in Phoenix as vacancy rates are now the lowest since 2008." RENTAL RATE TREND $26.00 $25.50 $25.00 $24.50 $24.00 $23.50 $23.43 $23.79 $24.05 $24.37 $24.76 $24.85 $25.13 $25.39 $25.43 $23.00 $22.50 $22.00 16' Q2 16' Q3 16' Q4 17' Q1 17' Q2 17' Q3 17' Q4 18' Q1 18' Q2 LINCOLN PROPERTY COMPANY / Q2 PHOENIX OFFICE / 3
SALES & INVESTMENTS Sale activity has increased this quarter as investor's look to capitalize on strong market fundamentals. Investor's confidence in the Phoenix Office Market continues to strengthen, with nearly $400M in investment activity year to date. Additionally, economic conditions continue to improve in Phoenix with a growing population and nearly 60K jobs created this year. The 2nd Quarter saw investment activity across a wide spectrum of submarkets, however Tempe, the Camelback Corridor and Downtown Phoenix continue to be the focal point of investments, all recording sales north of $60M. With a healthy economy and strong property fundamentals investment activity is expected to ramp up during the second half of 2018. TOP SALES Building 24th at Camelback / 302,209 RSF Seller Hines Buyer New York Life RE Investors Price $100,000,000 / $331 PSF Building Mckesson Campus / 271,085 RSF Seller Ryan Companies Buyer Griffin Capital REIT Price $67,000,000 / $247 Building CopperPoint Tower / 252,400 Seller Lexington Realty Trust Buyer Oak Street RE Capital Price $64,575,000 / $266 Building The Corporate / 271,782 Seller CarVal Investors Buyer City Office REIT Price $56,500,000 / $208 LINCOLN PROPERTY COMPANY / Q2 PHOENIX OFFICE / 4
DEVELOPMENT ACTIVITY As Phoenix continues to see and influx of new users as well as existing users looking to renew and expand, development activity has increased in order to keep pace with the growing demand for space. Currently, there is 2.76M SF under construction with several major projects in the pipeline. LPC's The Grand 2 is currently under construction and will feature a rooftop lounge, fitness facility and indoor/ outdoor tenant amenity areas. The Grand 2 is set to deliver next summer. Also, LPC is pleased to announce its newest development project, Union. At full build-out, Union will consist of 4 Class A Office buildings and bring 1.35M SF to the south east office market. This quarter saw 265k SF of office space delivered with the largest project being Rio 2100 for 150,000 SF. With 30% of space under construction already pre-leased, the demand for new product continues to rise. UNDER CONSTRUCTION Building The Grand 2 Developer Lincoln Property Company Square Feet 352,481 Submarket Tempe Building Chandler Viridian Developer Hines Square Feet 249,217 Submarket Chandler Building Camelback Collective Developer LaPour Square Feet 118,500 Submarket Camelback Corridor LINCOLN PROPERTY COMPANY / Q2 PHOENIX OFFICE / 5
HISTORICAL ABSORPTION "Metro Phoenix has now seen it's 20th consecutive quarter of positive space absorption, a clear indication of strong market fundamentals." NET ABSORPTION VS DELIVERIES 1,200,000 1,000,000 800,000 600,000 698,062 SF Average Net Absorption 400,000 200,000 0 16' Q2 16' Q3 16' Q4 17' Q1 17' Q2 17' Q3 17' Q4 18' Q1 18' Q2 Net Absorption Deliveries LINCOLN PROPERTY COMPANY / Q2 PHOENIX OFFICE / 6
SECOND QUARTER DATA DATA SOURCE TOTAL EXISTING SF TOTAL AVAILABLE SF VACANCY % NET ABSORPTION Q2 CBRE 116,601,069 17,343,701 14.87% 731,874 Colliers 147,591,313 21,712,643 14.70% 1,112,032 Costar 179,837,089 24,412,641 13.60% 1,281,385 Cushman & Wakefield 102,511,615 16,549,735 16.10% 786,100 JLL 87,751,358 17,374,769 19.80% 327,392 Lee & Associates 99,855,467 18,583,102 18.61% 732,248 NGKF 87,600,810 15,417,743 17.60% 637,624 LPC Averages 117,392,674 18,770,619 16.47% 801,236 DATA SOURCE UNDER CONSTRUCTION COMPLETED Q2 COMPLETED YTD ASKING RATES CBRE 2,745,634 296,064 591,064 $25.61 Colliers 2,963,278 220,000 599,161 $24.69 Costar 2,891,371 292,882 684,338 $25.04 Cushman & Wakefield 2,823,666 210,800 531,943 $25.28 JLL 2,726,559 210,769 531,943 $27.12 Lee & Associates 2,565,874 274,034 562,749 $25.22 NGKF 2,615,032 347,987 666,772 $25.08 LPC Averages 2,761,631 264,648 595,424 $25.43 FEATURED PROPERTIES The Grand Phase I... 02 Gainey Center II... 04 The Union... 05 The Grand... 06 Lincoln Property Company reflects market data averaged from across the market's major brokerage houses. All properties featured in this report are owned and managed by Lincoln Property Company. LINCOLN PROPERTY COMPANY / Q2 PHOENIX OFFICE / 7
ABOUT US DEVELOP ACQUIRE MANAGE NATIONAL PRESENCE. Local Focus. The Desert West Region includes Arizona, Nevada, Utah and New Mexico, is based in Phoenix and has been operating since 2001. We offer a comprehensive suite of value-added services for our clients ranging from development, construction management, property management and asset management services for office, industrial and retail sectors. Our expertise across a broad spectrum of real estate services enables us to design and execute projects for our clients/partners in support of their business and financial objectives. Desert West Region. LINCOLN PROPERTY COMPANY / Q2 PHOENIX OFFICE / 9
FOR ADDITIONAL INFORMATION, PLEASE CONTACT: David R. Krumwiede Executive Vice President 602.912.8877 dkrumwiede@lpc.com John H. Orsak Director of Real Estate 602.912.8879 jorsak@lpc.com Justin M. Arnitz Associate 602.912.8876 jarnitz@lpc.com 3131 E Camelback Rd Suite 318 Phoenix, AZ 85016 www.lpcphx.com