Savills Studley Report Phoenix office sector Q4 2018

Savills Studley Research Phoenix

SUMMARYMarket Highlights

LEASING FALLS DURING 2018

Deal volume totaled 5.8 million square feet (msf) during 2018, down from 6.2 msf during 2017.

AVAILABILITY RATE RISES

The availability rate* for the region rose by 40 basis points to 19.7%. The Class A availability rate posted a 30 basis point increase to 20.3%. The Class B and C availability rate dropped by 60 basis points to 19.0%.

MODERATE JUMP IN RENT

The overall asking rent in Phoenix increased by 3.7% to $27.34 during the third quarter. The average Class A rent, ticked up by 0.9% to $30.90.

SALES INCREASE

Office property sales during the first seven months of the year totaled $1.5 billion, a 18.4% increase compared to the first seven months of 2017.

*Availability includes all vacant space and space marketed for

lease with future occupancy in existing properties, as well as those

under construction.

“Phoenix’s economy and office market registered above-average employment growth and steady leasing over the course of 2018. A pickup in new construction has started to boost availability rates. Additionally, the proliferation of coworking space providers is introducing flexibility to the market."

Tiffany Winne,

Executive Vice President

02

Savills Studley Report | Phoenix

Construction Boosting Availability

Phoenix’s overall economy and office market stayed on a steady path of expansion in 2018. Over the course of the last 12 months, the region added 20,568 office-using jobs (a 3.6% increase). The growth eclipsed much weaker growth nationally, and was more than double Phoenix’s 1.6% gain in the prior 12 months. Phoenix’s business-friendly environment remains a strong draw for businesses seeking a balance between talent and affordability.

The steady movement of companies from other markets and sustained growth in local finance, insurance, healthcare and professional/business services firms has sustained leasing activity. Demand has been the steadiest in newer buildings constructed in the East Valley, but some firms are also pursuing value-play options in the Central Corridor and Airport Area. With the regional and national economy still in good shape, companies based in the region continue to invest in their workforce and workplace. A long list of other insurers and health care companies are expanding payroll, including Aetna and Anthem. Corporate Campus Expansion

Phoenix continues to benefit from local companies deepening their commitment, and an influx of businesses from other markets. Allstate Insurance Company took 117,000 sf at Park Place in the Price Road Corridor. The insurer said it plans to bring 2,500 new jobs to Chandler. The Chandler City Council is working on an incentive package with Allstate, which may clear the way for a new corporate campus. Care 1st Health Plan Arizona took 81,300 sf at Phoenix Gateway Center II. The insurer plans to hire an additional 250 employees in the relocation from 2355 E. Camelback. Banks, financial services and accountants have also been active. Deloitte committed to 102,000 sf at Rivulon in Gilbert. Deloitte announced plans for a technology solutions center there in June. Finally, in Chandler, Cascade Financial Services inked a 52,608-sf lease at The Hub.

Inc. 5000 recently published its list of the fastest growing companies in the region. The list includes several companies such as pharmacy specialist Tailstorm Health and online auto parts marketplace RevolutionParts that have fewer than 100 employees. Other companies have registered more substantial growth. Alpha Connect, for example, has skyrocketed

Source: Bureau of Labor Statistics^

2009

2010

2010

2012

2013

2014

2015

2016

2017

2018

-14.0%

-10.0%

-6.0%

-2.0%

2.0%

6.0%

10.0%

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70Millions

Phoenix Office Emp. Phoenix % Change U.S. (% Annual Change)

Office-Using Employment Trends

$30.90

$23.13$24.38

$18.54

$27.34

$19.97

$0

$5

$10

$15

$20

$25

$30

$35

Q4 '18 Q4 '17 Q4 '16 Q4 '15Q4 '14Q4 '13

Rental Rate Trends

Class A Phoenix RegionClass B & C Phoenix RegionOverall Phoenix Region

Asking Rent Trends ($/sf)

20.3%21.1%

19.2%18.4%

0%

10%

20%

30%

Q4 '18 Q4 '17 Q4 '16 Q4 '15 Q4 '14 Q4 '13

Availability Rate Trends

Class A Phoenix RegionClass B & C Phoenix RegionOverall Phoenix Region

Availability Rate Trends

savills-studley.com/research 03

Q4 2018

Tenant Sq Feet Address Market AreaAllstate Insurance Co. 117,000 1450 S Spectrum Blvd ChandlerDeloitte 102,000 310 E Rivulon Blvd ChandlerCare1st Health Plan Arizona 81,300 4686 E Van Buren St 44th Street CorridorWeWork 54,000 2425 E Camelback Rd Camelback CorridorProgressive Leasing 52,291 5651 W Talavi Blvd Deer Valley/AirportCascade Financial Services 52,000 2701 E Ryan Rd ChandlerCognizant 51,270 1130 N Alma School Rd TempeNovel Coworking 31,508 2828 N Central Ave Midtown

Metromile 28,391 1501 W Fountainhead Pky Airport AreaCalifornia Casualty 27,750 5651 W Talavi Blvd Deer Valley/Airport

Sum of Leases 597,510

from 89 employees four years ago to nearly 400 currently. The BPO (business process outsourcing) provider has been in business since 2013.

More Space Options

Even with sustained leasing, the availability rate has increased slightly in recent quarters as new construction activity intensifies. Reversing trends from the prior quarter, the Class A availability rate for the region rose from 20% to 20.3%. The Central Corridor posted a jump of more than a full percentage point, spiking from 19.6% to 20.7%. Scottsdale also jumped, rising from 18.2% to 18.9%.

New construction has been kept in check for most of this cycle, but has picked up of late. At the close of the year, Phoenix had 1.1 msf underway – just over 10% of the space was pre-leased. The East Valley accounts for the bulk of the construction activity. Several properties are underway in Chandler. Phase II at Chandler Freeway Crossing II is scheduled to deliver in early 2019 and has yet to secure any tenants. The developer is adding amenities such as a collaborative roof deck. Finally, Block 23 at CityScape, Downtown is just a few quarters away from completion. This will be a mixed-use development including office space, 300 apartment units and a 45,000 sf Fry’s Grocery store.

Tempe also has significant product in the pipeline. Rent growth in Downtown Tempe has been well above the market norm as new construction activity boosts rent. The Grand at Papago Park (346,000 sf) and Phase I at The Watermark, both have asking rents pushing above $40.00/sf. Also in Tempe, I.D.E.A. Tempe Phase I is more than 50% leased. The 185,833-sf building is scheduled to deliver in 2020. Overall rent for the entire region averaged $27.34, well above the peak attained in the last cycle, back in 2007. The premium paid for the very newest buildings, with some approaching the mid-$40/sf is far and away above any levels attained in the prior cycle.

Coworking Surge

Tenants seeking flexible space options have a wider array of options. These options are coming from coworking space providers – not from sublet supply. The amount of sublet space for lease fell by nearly 15% from 1.7 msf at the start of 2018, to 1.3 msf at the close of the year. More tenants are considering the growing set of coworking space options. WeWork had been quiet in

Phoenix up until this quarter. Now rebranded as We Companies, the firm leased 54,000 sf at 2425 E. Camelback Road for its first Phoenix location. The New York City-based coworking trailblazer plans to add another two Phoenix centers later this year. WeWork is a bit late to the coworking surge in Phoenix. Industrious opened its second Phoenix location in the quarter, taking 33,000 sf at Scottsdale Fashion Square and Serendipity Labs has opened at Camelback Collective. Additionally, Workuity announced a second location at 3133 W. Frye Road in Chandler.

Investment Opportunities

With pricing in gateway markets still extremely high, more investors continue to consider assets in secondary markets such as Phoenix. Pricing on value-add and opportunistic assets are well below gateway prices. In October, Taconic Capital

sold Chase Tower to a private investor based in New York City for $107.5 million. ($133.44/sf) The building was nearly fully occupied at time of sale, but JPMorgan Chase which occupies more than 450,000 sf at the 723,922-sf property is expected to vacate a significant portion of its space. City Office REIT (a Vancouver, Canada-based investor) paid $53.2 million ($303.54/sf) for Camelback Square. The 175,268-sf office building in Scottsdale was nearly 85% occupied. Velocis, the seller, had undertaken renovations in the last several years – updating common areas, landscaping and adding tenant lounges and a shared conference room.

Availability Rate Comparison Overall Rental Rate Comparison

Major Transactions

$36.66$34.69

$33.15$32.15

$31.45$29.93$29.69

$29.09$29.07$28.57$28.12

$27.34$27.16

$26.59$26.49$26.15

$25.26$24.71$24.66$24.61

$23.98$23.49$23.34

$22.53$21.60

$20.97$20.58$20.51

$19.56$19.44$19.08

$16.23$0 $10 $20 $30 $40

TempeUS Index

Camelback CorridorDowntown

Scottsdale SouthEast Valley

Deer Valley/AirportScottsdale

Scottsdale/AirparkSouthwest Phoenix

ChandlerPhoenix Region

Central ScottsdaleCentral Corridor

44th Street CorridorNorth I-17

Paradise ValleyAirport Area

South Tempe/AhwatukeeGateway Airport/Loop 202

ArrowheadMidtown

West I-10Loop 303/Surprise

GlendaleN Scottsdale/Carefree

Piestewa Peak CorridorSuperstition Corridor

Northwest PhoenixMesa East

Midtown/Central PhoenixMesa Downtown

3.0%6.1%

8.2%9.2%

11.1%13.0%13.1%13.5%

14.6%14.6%

15.7%16.3%16.4%

17.4%17.9%18.4%18.9%19.3%19.5%19.7%

20.6%20.6%20.6%

23.1%23.3%23.7%24.3%24.5%

26.5%27.8%27.9%28.7%

0% 10% 20% 30%

Loop 303/SurpriseMesa Downtown

Mesa EastGlendale

Midtown/Central PhoenixTempe

ArrowheadSouthwest Phoenix

Superstition CorridorCentral ScottsdaleDeer Valley/Airport

Downtown44th Street Corridor

South Tempe/AhwatukeeUS Index

East ValleyScottsdale

Paradise ValleyN Scottsdale/Carefree

Phoenix RegionScottsdale South

Scottsdale/AirparkCentral Corridor

Piestewa Peak CorridorAirport Area

North I-17Midtown

Camelback CorridorGateway Airport/Loop 202

West I-10Northwest Phoenix

Chandler

Savills Studley Report | Phoenix

04

Submarket Total

InventorySF

(1000's)

Leasing(Last 12 months)

This Quarter

%Change

fromLast Qtr.

YearAgo

ThisQuarter

ppChange

fromLast Qtr. (1)

YearAgo

ThisQuarter

%Change

fromLast Qtr.

YearAgo

Airport Area 8,832 686 2,060 0.2% 2,409 23.3% 0.1% 27.3% $24.71 2.2% $24.71Airport Area - Class A 1,598 154 380 1.9% 451 23.8% 0.5% 28.2% $26.80 0.8% $26.59South Tempe/Ahwatukee 5,424 164 946 4.4% 598 17.4% 0.7% 11.0% $24.66 2.5% $23.90South Tempe/Ahwatukee - Class A 1,013 0 44 -68.7% 18 4.3% -9.5% 1.8% $30.80 7.9% $27.56Downtown 7,933 236 1,290 17.3% 917 16.3% 2.4% 11.9% $32.15 -1.0% $30.16Downtown - Class A 4,871 216 878 17.8% 609 18.0% 2.7% 13.1% $33.02 -1.5% $31.17Midtown 9,527 456 2,316 0.2% 2,295 24.3% 0.0% 24.1% $23.49 1.2% $22.26Midtown - Class A 4,568 237 1,077 -2.4% 1,012 23.6% -0.6% 22.1% $25.81 1.0% $24.7944th Street Corridor 2,694 169 442 -7.1% 482 16.4% -1.3% 17.9% $26.49 -3.0% $26.3544th Street Corridor - Class A 1,707 132 361 0.6% 344 21.2% N/A N/A $27.57 0.4% $26.89Camelback Corridor 7,522 452 1,845 5.1% 1,478 24.5% 1.2% 19.6% $33.15 2.9% $30.75Camelback Corridor - A 4,740 283 1,256 5.0% 1,042 26.5% 1.3% 22.0% $35.49 -0.6% $34.06Midtown/Central Phoenix 1,667 93 185 -4.8% 181 11.1% -0.6% 10.9% $19.08 4.5% $17.42Midtown/Central Phoenix - Class A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/AChandler 6,532 0 1,873 3.7% 1,965 28.7% 1.0% 32.2% $28.12 1.0% $25.71Chandler - Class A 3,143 93 879 -1.2% 852 27.9% -0.4% 28.8% $30.14 1.3% $28.79Gateway Airport/Loop 202 239 332 63 141.1% 32 26.5% 15.5% 13.4% $24.61 4.6% $25.86Gateway Airport/Loop 202 - Class A 0 157 0 0.0% 0 N/A N/A N/A N/A N/A N/AMesa Downtown 650 0 39 -5.4% 27 6.1% -0.3% 4.2% $16.23 3.5% $14.91Mesa Downtown - Class A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/AMesa East 210 0 17 N/A 42 8.2% -5.3% 20.0% $19.44 9.2% $15.34Mesa East - Class A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/ASuperstition Corridor 2,571 1 376 4.0% 400 14.6% 0.6% 15.5% $20.51 2.5% $19.45Superstition Corridor - Class A 581 0 138 10.8% 162 23.8% 2.3% 27.8% $24.03 3.7% $23.24Tempe 9,132 24 1,186 -10.5% 1,272 13.0% -1.5% 15.0% $36.66 3.6% $27.84Tempe - Class A 6,033 0 1,014 -1.6% 927 16.8% -0.3% 17.2% $39.15 1.2% $34.75N Phoenix/Cave Creek 0 0 0 0.0% 0 N/A N/A N/A N/A N/A N/AN Phoenix/Cave Creek - Class A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/AParadise Valley 1,996 59 385 1.5% 385 19.3% 0.3% 19.3% $25.26 -0.1% $24.05Paradise Valley- Class A 1,302 92 250 2.0% 252 19.2% 0.4% 19.3% $28.19 -0.1% $27.76Piestewa Peak Corridor 1,802 245 416 -2.9% 421 23.1% -0.7% 23.4% $20.58 1.4% $20.20Piestewa Peak Corridor - Class A 287 207 28 0.0% 14 9.6% 0.0% 4.8% $26.50 0.0% $26.50Northwest Phoenix 5,317 0 1,485 -1.9% 1,452 27.9% -0.5% 27.3% $19.56 1.8% $19.11Northwest Phoenix - Class A 1,184 0 401 0.3% 479 33.9% 0.1% 40.4% $22.93 0.4% $22.74Arrowhead 648 158 85 -7.1% 48 13.1% -1.0% 7.4% $23.98 -3.4% $22.51Arrowhead - Class A 81 45 N/A N/A N/A N/A N/A N/A N/A N/A N/ADeer Valley/Airport 7,641 6 1,198 0.9% 733 15.7% 0.1% 9.6% $29.69 28.8% $22.29Deer Valley/Airport - Class A 2,024 59 79 21.8% 81 3.9% 0.7% 4.0% $24.52 2.6% $23.60North I-17 293 220 69 2.1% 70 23.7% 0.5% 23.7% $26.15 4.9% $24.56North I-17 - Class A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/ACentral Scottsdale 5,200 27 761 6.9% 664 14.6% 0.9% 12.8% $27.16 2.7% $25.54Central Scottsdale - Class A 2,325 318 372 4.0% 333 16.0% 0.6% 14.3% $28.22 -2.1% $27.35N Scottsdale/Carefree 373 221 73 -2.8% 14 19.5% -0.6% 3.8% $20.97 5.9% $18.88N Scottsdale/Carefree - A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/AScottsdale Airpark 9,005 2 1,852 1.8% 1,706 20.6% 0.4% 18.9% $29.07 0.2% $28.09Scottsdale Airpark- Class A 5,993 0 1,353 -4.3% 1,275 22.6% -1.0% 21.3% $30.19 2.0% $29.34Scottsdale South 4,343 412 893 6.5% 982 20.6% 1.3% 24.1% $31.45 1.4% $31.26Scottsdale South - Class A 2,696 139 517 20.8% 563 19.2% 3.3% 23.3% $32.80 2.0% $32.78Glendale 1,418 511 102 -0.9% 92 7.2% -0.1% 6.5% $21.60 -0.1% $21.47Glendale - Class A 295 342 54 0.8% 27 18.2% 0.1% 9.1% $24.84 0.0% $24.31Loop 303/Surprise 198 433 6 -24.4% 16 3.0% -1.0% 8.1% $22.53 -1.3% $24.78Loop 303/Surprise - Class A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/ASouthwest Phoenix 1,593 294 215 0.0% 249 13.5% 0.0% 15.6% $28.57 0.0% $25.57Southwest Phoenix - Class A 917 138 142 0.0% 142 15.5% 0.0% 15.5% $28.88 0.0% $28.88West I-10 491 0 136 53.5% 93 27.8% 0.0% 19.0% $23.34 0.7% $22.28West I-10 - Class A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/ACentral Corridor 17,460 763 3,605 5.7% 3,212 20.6% 1.1% 18.6% $26.59 1.5% $24.56Central Corridor - Class A 9,440 2,303 1,955 5.7% 1,621 20.7% 1.1% 17.6% $29.05 1.0% $27.10East Valley 19,334 696 3,555 -1.0% 3,738 18.4% -0.2% 20.5% $29.93 1.2% $23.58East Valley - Class A 9,758 1,114 2,031 -0.7% 1,941 20.8% -0.1% 21.7% $34.22 1.1% $30.90Scottsdale 18,921 455 3,579 3.9% 3,366 18.9% 0.7% 18.1% $29.09 1.1% $28.16Scottsdale - Class A 11,013 687 2,243 1.9% 2,171 20.4% 0.4% 20.2% $30.46 1.6% $29.77Phoenix Region 103,253 5,786 20,314 2.0% 19,022 19.7% 0.4% 18.7% $27.34 3.7% $24.95Phoenix Region - Class A 45,359 2,921 9,226 1.4% 8,589 20.3% 0.3% 19.5% $30.90 0.9% $28.76

AvailableSF

AvailabilityRate

Asking RentsPer SF

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(1) Percentage point change for availability rates. Unless otherwise noted, all rents quoted throughout this report are average asking gross (full service) rents psf. Statistics are calculated using both direct and sublease information. ^Unless otherwise noted, source for data is Savills Studley.

The information in this report is obtained from sources deemed reliable, but no representation is made as to the accuracy thereof. Statistics compiled with the support of The CoStar Group. Copyright © 2019 Savills Studley

Savills StudleyAnchor Centre East2231 E. Camelback RoadSuite 209Phoenix, AZ 85016(602) 783-1610

Office ContactTiffany WinneEVP, Designated Brokertwinne@savills-studley.com(602) 783-1611

Corporate Research ContactKeith DeCoster - Directorkdecoster@savills-studley.com(212) 326-1023