Skysong Center

Construction is still not finished, but the fifth building at the Skysong Center already has a major tenant.

The commercial office market is strong in Scottsdale, buoyed by heavy interest from tech companies in the city’s downtown.

Companies looking to move into the downtown area are attracted by the slew of amenities — including restaurants, bars and retail — located within walking distance that can help them attract employees in a competitive marketplace.

Getting creative with existing space has benefited property owners in the area, as no new Class A office space has opened in the area in quite some time due to a lack of developable land.

“Developments are tough to find (in downtown Scottsdale), and they have much smaller lots and parcels. That is one challenge,” said Bryan Taute, executive vice president with CBRE.

Taute said that the success of high-end apartment projects in the downtown area has made it difficult for developers to acquire land for new office projects.

“The apartments are so successful in that area that they tend to outbid office developers (for available land),” he said.

That lack of space has not decreased interest in the area, though.

“Downtown is really hot, even though there is not much (new) office product,” said Kelly F. O’Dea, senior associate with Marcus & Millichap’s National Office and Industrial Properties Group. “It is more in the creative office space.”

Taute said tenants are flocking to projects like The Quad, which is located just south of downtown at Thomas Road and 64th Street. The site underwent a major redevelopment in 2016.

Taute said the Galleria Corporate Centre — reborn as an office development after it failed as a retail hub under the name Scottsdale Galleria — has attracted tech companies like Weebly, Zillow and Yelp.

Other companies are taking an unorthodox approach to enter the sought-after downtown Scottsdale area.

New York-based Industrious, which has dozens of high-end co-working spaces nationwide, is preparing to open a new location in a former department store site at Scottsdale Fashion Square this winter. The company already opened its first Arizona location near that site in downtown Scottsdale over the summer.

The Fashion Square project is part of a larger partnership between Industrious and the mall’s owner Macerich that will see the co-working startup open locations at select malls around the country.

“Getting more of that larger corporate synergy in downtown is what is missing there,” O’Dea said. “You have some but there is a lot of older product, and I think a newer development would do really well there.”

The area may get some of that new product over the next several years.

Stockdale Capital Partners, the company behind Galleria Corporate Centre, is planning a new project downtown called Marquee that will feature 200,000 square feet of high-end office space.

The company plans to break ground on Marquee in the first quarter of 2019.

Spring Creek Development is planning an expansion of the SouthBridge development downtown along the canal and Fifth Avenue that would include high-end condominiums, retail, two hotels and a 150,000-square-foot Class A office building.

A smaller project, called The Cadre, recently received a recommendation for approval from the Development Review Board. The three-story mixed use project would be located at 4161 N. Craftsman Court and feature just over 3,000 square feet of ground floor commercial space with six residential units on the upper floors.

Supported by the interest in the downtown area, Central/South Scottsdale has a low vacancy rate at 13.4 percent.

To the south, the SkySong Center offers an alternative for tenants that are looking for property near downtown but are seeking more affordable rents, Taute said.

The fifth building at SkySong Center is still under construction and has already locked down a major tenant. Berkadia signed a 10-year lease to occupy the entire second floor of the building.

While Class A product like SkySong — which is newer and more amenity-rich than other classes of office space — typically attracts high-profile tenants, it is not the only product class driving the market.

The vacancy rate for Class B office space has dropped Valley wide due to increased transactions in South Scottsdale and Tempe, according to CBRE’s most recent Marketview report for the Phoenix office sector.

Class B space is typically older than Class A space and can have less amenities, but Class B buildings can still attract desirable tenants. Taute said interest in Class B space is largely being driven by the shortage of Class A space in desirable areas.

“Tenants will continue to search the market for quality space in the most high-demand submarkets (Tempe and South Scottsdale) where employers can attract top talent,” the CBRE report states. “These submarkets remain high desirable due to the preferred walkability of restaurants, retailers and other amenities.”

Interest in the Airpark market is also high, though the area is not quite as hot as downtown, Taute said.

The vacancy rate for Airpark office product in the area dropped from just over 14 percent to 13.5 percent during the past year, according to the CBRE report. The area is primarily a hub for financial services and corporate headquarters.

Taute said he expects to see some new construction in the area, though it will be selective to meet market demand.

Still, Scottsdale is also experiencing strong net absorption –  the total new occupied square footage minus square footage no longer occupied by tenants.

The Phoenix Metro has experienced 32 straight weeks of positive net absorption, and net absorption totaled nearly 750,000 square feet in the second quarter of  2018.

Over half of that activity was concentrated in just four submarkets: Tempe, South Scottsdale, Scottsdale Airpark and Metrocenter in Phoenix. Scottsdale Airpark and South Scottsdale posted net absorption numbers of 89,000 square feet and 85,000 square feet, respectively, during the second quarters.