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Posted Feb 28, 2024, 3:19 PM
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Modulator
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Join Date: Nov 2013
Location: Phoenix, AZ
Posts: 4,404
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Another black-eye to the downtown Phoenix office submarket. Freeport-McMoRan looking to potentially leave downtown.
Quote:
By Audrey Jensen and Ron Davis – Phoenix Business Journal
Feb 28, 2024
Freeport-McMoRan Inc. (NYSE: FCX), the second-largest publicly traded company in Arizona, is eyeing an exit from the downtown Phoenix office tower that bears its name.
The international mining giant, which had a net income of $1.8 billion and employed 27,200 people worldwide in 2023, is preparing to sublease its 250,000-square-foot global headquarters office in the 26-story Freeport-McMoRan Center. The company's lease for the top eight stories of the tower doesn't expire until May 2027.
Linda Hayes, Freeport vice president of communications, said in a statement that "based on the success" of a hybrid-working environment, the company has engaged brokerage firm Cresa Global Inc. to assist in subleasing its downtown office space.
Freeport employs 1,000 in the Phoenix area, according to Hayes. This includes workers that support its global headquarters operations in finance, human resources, information technology and planning, according to its website.
The company said employees have been working out of "redesigned and expanded" offices at the Cotton Center, a large business park in Phoenix near 40th Street and Interstate 10, since the outset of the Covid-19 pandemic.
"These facilities offer flexible work and meeting spaces designed to be collaborative, efficient and more conducive to a hybrid working model," Hayes said in a statement. "Freeport's commitment to Phoenix remains strong. We look forward to our continued role as a meaningful contributor to the city while supporting a work environment that best meets the needs of our employees."
The global mining company has leased its space at the Freeport-McMoRan Center at 333 N. Central Ave. for about 15 years. It shares the building with the Westin Phoenix Downtown hotel, which has occupied the lower nine floors below Freeport's space since the building was developed in 2009. Freeport has two five-year renewal options once its lease expires in 2027, according to data from CoStar Group Inc., but it's unclear whether the company will exercise those options.
Downtown Phoenix in transition
Downtown Phoenix has been in a transition phase for several years with the exit of longtime downtown tower tenants including Wells Fargo, JPMorgan Chase and US Bank, while other commercial development including multifamily and education uses have significantly grown downtown.
The downtown office submarket had a vacancy rate of more than 21% in the fourth quarter of 2023, which is higher than the metro's overall 16% vacancy rate and third among the Valley's office submarkets, according to data from CoStar. For comparison, downtown had a 11.5% vacancy rate in Q4 2019. Over those four years, downtown saw a cumulative negative absorption of about 1 million square feet, CoStar found.
A recent University of Toronto study found that activity in downtown Phoenix had recovered 72% from the Covid-19 pandemic by the spring of 2023. Phoenix ranked No. 21 out of 63 downtowns measured based on cellphone activity data.
The Freeport building is owned by El Segundo, California-based REIT Peakstone Realty Trust (NYSE: PKST), which acquired the asset through its acquisition of Cole Office & Industrial in 2021. Freeport's downtown Phoenix lease makes it one of Peakstone's five largest tenants, which altogether account for a quarter of its revenue, according to its most recent annual filing in February. Freeport makes up approximately 4% of Peakstone's revenue with an annualized base rent of $7.8 million, the filing said.
In total, the company owns seven properties in Arizona, which made up about 12% of its overall annualized base rent in 2023, the highest rent amount of any state in which it holds assets.
If Freeport chooses not to renew its lease in three years, Peakstone will be faced with the challenge of backfilling a large office footprint — and making up millions of dollars in annual rent payments.
Peakstone did not respond to requests for comment about its plans for the Freeport-McMoRan Center.
Challenges remain to fill Freeport space
Should Freeport's space hit the sublease market, it will join other major corporations across the Valley looking to restructure or walk away from their large office footprints amid challenging market conditions.
Tempe-based Carvana Co., after putting nearly 300,000 square feet of its Marina Heights office on the sublease market, will not take occupancy of a new office campus in Tempe that was originally going to house its headquarters. Coworking giant WeWork Inc. plans to vacate nearly 100,000 square feet of space across two properties in downtown Phoenix while working through a Chapter 11 bankruptcy.
Despite ranking toward the top of the Valley's office submarkets for vacant space, there are fewer sublease opportunities downtown compared to the rest of the Valley. Roughly 150,000 square feet of downtown's total inventory of 11.5 million rentable square feet — just over 1% — is currently on the sublease market, according to CoStar data. That compares to 7.8 million of rentable square feet available metro-wide.
The Freeport sublease would effectively more than double available sublease space in the downtown submarket.
"An additional vacancy of this size to a submarket that was already seeing vacancy increase pretty steadily over the past four years just adds further pressure to fundamentals of the downtown office market," said Connor Devereux, CoStar's director of market analytics.
John Bonnell, a managing director for Stream Realty Partners in Phoenix, said perception will play a role in how vacated space will impact downtown Phoenix, which he said is currently in a growth period with more residents and students. While seven construction cranes were visible in downtown Phoenix during the most recent crane count, they are dedicated to residential and mixed-use projects rather than new office space.
Companies looking for office space are targeting footprints ranging from 25,000 square feet to 100,000 square feet that have up-to-date amenities and design. Large employers, specifically, look to be near labor pools and near the freeways, Bonnell said.
In the next five years, downtown Phoenix is expected to see a 10.6% increase in employment, adding about 6,700 workers to the area as a result of education, technology and biosciences growth, which could increase demand for commercial space, according to an economic report of downtown in 2023.
While some office towers in downtown Phoenix have invested millions in upgrades to attract new tenants, other towers, such as the former Chase building, could be converted into a mix of uses including multifamily, hospitality and retail.
Devereux said CoStar is currently tracking three downtown Phoenix buildings that have more than 200,000 square feet of available space.
Most office tenants in the Phoenix area are also mostly service headquarters for companies based in other markets, Bonnell noted.
"That's going to be the challenge for that much space in downtown, for one tenant," Bonnell said. "We just don't have a lot of those corporate users in the market looking for their corporate headquarters here."
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Source: Phoenix Business Journal https://www.bizjournals.com/phoenix/...02-28&empos=p1
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