The sandstorm continues. In Phoenix, we call it a haboob. Uncertainty, again, served as the main theme of the Metro Phoenix Office Market in the third quarter. Vacancy didn’t really rise that much in the past 90 days. Rental rates softened only slightly. Sublease space spiked up again this quarter. We are seeing companies who can’t wait to get back to the office in full force. On the other side, some think they will never return to the office. Nobody can accurately predict the future. With that lead-in, here is the data I can report:
Net Absorption decreased by a 560,000 SF swing from Q2 AND went slightly negative for the first time in 10 years. 15 out of 28 submarkets experienced a decrease this quarter.
Direct Vacancy increased only slightly from 15.8% to 15.9%.
Sublease Space increased by 675,447 SF in Q3, reaching a current total of 2.6 million SF (Metro Phoenix consists of 106 million SF).
The largest lease executed was only 31,622 SF (CVO in Downtown Phoenix).
Here’s what the data tell us:
- Negative net absorption is a red flag signifying a soft market is coming.
- Sublease space is becoming a significant concern at such a high rate of increase. Some of this will turn into vacancy.
- Large tenants remain on the sidelines.
Below is a link to our Lee & Associates Arizona Third Quarter Office Report, and as usual, here are my top takeaways:
Keep Your Tenants– If you are a landlord, make every deal you can within reason, especially with existing tenants.
Flexibility– If you are a tenant, keep your flexibility. With so much uncertainty, businesses will lease space at the buildings to give them flexibility in term and size.
No Crazy Bargains, Yet– With direct vacancy remaining flat, rates overall have not fallen yet. This could change in 2021. Larger concessions are already being offered to tenants today…
Lastly, if you need a good broker to help you navigate these market conditions, give me a call.