The Metro Phoenix Office Market is in the midst of a recovery. Ok, a slow one BUT still a recovery. Net absorption, the net increase in physical office space occupied, and THE key market indicator, bounced back in a big way in Q2 at 913,413 SF. In Q1 it had slipped to a – 55,390 SF. Absorption helps show that the market is on track to have simply: an average year. The 20-year average for net absorption in Metro Phoenix is 1.6 million SF. At mid-year, we are on track at 50% of that mark. The 20-year average for vacancy is 18%. The office market sits today at 17.2 of direct vacancy. New construction annual deliveries have averaged 2.2 million SF over the past 20 years. Currently, there is 870,000 SF under construction, noticeably lower than the average.
Despite all of the mixed signals from headlines and anecdotes on returning to the office, the market is doing fine. Below is a link to our Lee & Associates Arizona Second Quarter Office Report, and as usual, here are my top takeaways:
Sublease space is 3x higher than normal – One indicator not in line with 20-year averages is the amount of sublease space. Today it sits at 5.8 million SF, approximately 3x the normal figure. Most of this space will become direct space in the next few years, and its vacancy effects (5.5% of extra vacancy) will be a market force.
New construction is down – The market gets in trouble when there is overbuilding, or net absorption approaches zero. Neither of those scenarios exist, lessening the likelihood of a major correction.
Lease rates holding or rising – Given the uncertainty of the office sector, one would naturally have expected lease rates to fall. However, spiking tenant improvement costs, coupled with tenant’s need for quality space have caused lease rates to either hold firm, or in many cases rise.
The battle to get employees back in the office continues. There are nuances all over the market. Regardless of your situation, I’m happy to discuss how I can position your company’s real estate better in this market.
Click here to view report.