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Quick Summary: The Metro Phoenix office market broke its streak of four straight quarters of negative net absorption, finishing with positive 178,254 SF for Q3. Year-to-date absorption, however, remains -436,922 SF. Vacancy dropped slightly from 18 to 17.8% for the region, but sublease space inventory rose from 4.1 million SF to 4.3 million SF. Average asking rates dropped slightly by only 22 cents per square foot.
What does all this mean? It means the office market is still disoriented. In a normal year, the Greater Phoenix Market hits 2.5 million SF of net absorption. We are still 3 million SF away from that figure in 2021. Some businesses (mostly smaller groups) have regained confidence in their plans and are returning to the office. Others are confident they can move forward with a new hybrid plan in reduced square footage, while others continue with short-term renewals. Lastly, large corporations are still taking a wait-and-see approach. Landlords remain optimistic despite the high vacancy. We have to counsel our clients to remain patient as tenants are being extra thoughtful on their space needs.
In uncertain times like these, it’s best to get a real view of your specific lease situation, and stay in close contact with a good broker. Below is a link to our Lee & Associates Arizona Third Quarter Office Report, and as usual, here are my top takeaways:
Lease Rates Have Not Dropped Precipitously– This is due largely to the rise in tenant improvement and shell construction pricing. Rising construction costs are making deal negotiations tough as both sides figure out how to cover the cost of finishing a space out.
Tempe has the Highest Concentration of Subleases– This submarket has been the most active over the past cycle and now has nearly 1 million SF or 22% of the total Metro-wide sublease inventory.
A Big First Step– The first quarter since Q2 2020 with positive net absorption is a breath of fresh air. Year to date this figure is still negative, but it’s a step in the right direction for the recovery of the offie market…
If you need a good broker to represent you, please call me. Or if you just want to discuss the market, I would welcome the conversation.