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January 25, 2018

5 Real Estate Fears: Old, outdated office space needs new life

Phoenix Business Journal

Mike Sunnucks

Phoenix's office vacancy rate closed 2017 at 19.5 percent, according to commercial real estate firm JLL.

That is higher than other Western markets such as San Diego (10.3 percent), Silicon Valley (9.5 percent), Portland (7 percent) and Seattle (17.7 percent), according CRE firm Kidder Mathews. It also compares poorly to a 15.7 percent national office vacancy rate, according to real estate research firm Reis Inc.

But for Phoenix, the rate is the lowest since 2009.

Bryan Taute, an executive vice president with CBRE Group Inc. (NYSE: CBG), said vacancy rates for Class A space in desired submarkets such as Scottsdale and Tempe are low. JLL reports the Class A vacancy rate in Tempe ended the year at 6.4 percent. It's 6.1 percent in Scottsdale.

The problem is older Class B and C space, where Class B vacancy rates are 24.3 percent regionally, compared with 12.9 percent for Class A space.

Some older empty spaces around town are in less attractive or less desirable submarkets or almost obsolete space. But there are design and adaptive-reuse efforts to make older spaces more enticing.

Tenants, companies who own spaces and some forward-thinking developers and landlords willing to spend money are opening up floor plans and offering modern spaces modeled after technology companies, ad agencies and even restaurant spaces.

"We're seeing a shift in how companies think of themselves and think of their employees," said Josh Thompson, a senior project manager at design and architecture firm Ware Malcomb in Scottsdale.

Changes are geared toward employees who want their workplace to be more collaborative and have a sense of place.

"They're focusing on creating an experience," said Ware Malcomb Principal Kevin Evernham.

More employers want open and collaborative spaces, fewer offices, exposed walls, standing desks and a creative palette of colors.

Ryan Sarbinoff, regional manager for commercial real estate firm Marcus & Millichap, and broker Kelly O'Dea, also with Marcus & Millichap, said tenant trends include floor-to-ceiling windows and office break rooms and kitchens in the front of the office as a centerpiece.

Landlords and developers willing to spend to improve spaces have a competitive advantage, Sarbinoff said. The challenge is getting them to spend on the changes.

"Costs have always been a big issue," said Niki Ward, an interior design expert with Ware Malcomb.

Some older buildings also have floor plans and building code issues that discourage updating spaces.

For the full story, go to Phoenix Business Journal.

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