The Metro Phoenix Office Market remains in correction mode. No one knows to what extent it will correct nor when there will be a significant number of distressed sales…but we think there will be some. Here are the numbers behind the correction happening now in the market: In Q1 2024 net absorption, the most telling indicator of market health, went negative again, this time by -497,017 SF. This means that in just one quarter, the market lost more leased office space than it did in all of 2023 (i.e. -485,000 SF). Keep in mind, the 20-year average for net absorption in Greater Phoenix measures a positive 1.6 million SF. With 2023 negative and Q1 2024 negative, the market is correcting now.
Given the above and an increase in inventory it was still not enough to reduce asking lease rates across the entire metro area. Those increased by $0.30/SF/YR- due to sustained, elevated tenant improvement costs, and tenants’ unwillingness to come out of pocket for most build-outs.
See below for more specific insights, as well as a link to our Lee & Associates 1st Quarter of 2024 Office Report.
My top 3 takeaways:
— Sublease Space Actually Decreased in Q1: Greater Phoenix sublease inventory finally decreased by a noticeable amount of 118,000 SF. Sublease inventory now stands at 6.76 million square feet and the market will need time to process this vacancy- especially given that tenants are giving up more space than they are leasing.
— Spec Suites Are Win-Win: With deal-making a challenge, able owners continue to build higher quality (and quantity) of spec suites. In return, tenants are leasing them, oftentimes at a premium, but with no risk of any out-of-pocket expenses. Check out this relevant case study from one of my clients:
https://acrobat.adobe.com/id/urn:aaid:sc:VA6C2:9e016c96-226b-4936-a9c2-dd6d13eaccf2https://www.bizjournals.com/phoenix/news/2024/04/11/gainey-center-ii-adds-new-tenants-tri-point.html
— Mind the Gap- Sales Slowdown: With office sales decreasing to $208 million in Q1, compared to $289 million last quarter, it’s clear that a wide gap separates buyers and sellers (or their lenders).
In these changing times, the Phoenix office market shows signs of challenge, but also resilience and opportunity. If you have questions about the report or need representation, please call me!
602.954.3769
acheney@leearizona.com
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