The Third Quarter proved to be another reminder of how challenging these times are for the Metro Phoenix Office market. Net absorption went negative in a big way, at -355,027 SF over the past 90 days. This drags the year-to-date figure down to -540,940 SF and puts office users on track to vacate more space than they lease in a calendar year, something we haven’t seen since 2009. Note that Phoenix Metro’s 20-year average for net absorption measures a positive 1.6 million SF.
Despite more companies coming back to the office, the negative absorption figures show us that employers are not done shedding excess space yet. They are returning to the office, just in a smaller way. In many cases, leasing space to a company that now takes 25-33% as much as they did pre-pandemic, is not uncommon for landlords.
Some silver lining shows that sublease space inventory decreased in Q3. This has not occurred since 2019…
Below is a link to our Lee & Associates Arizona Third Quarter 2023 Office Report, and as usual, here are my top three takeaways:
Asking Lease Rates Decreased– For the first time since 2018, lease rates actually fell slightly. This was expected two years ago, but high construction prices necessary to improve spaces, caused them to rise…until this quarter.
New Construction Pipeline Turned Off– There is only 402,194 SF of new office product under construction right now. Over the past 20 years, the only year with a lower construction pipeline was 2011. There is nothing scheduled to break ground next year.
Tempe Struggling– During the last cycle, Tempe became the largest submarket in Metro Phoenix and absorbed the most new employment. Year to date, it has experienced more negative net absorption (-550,663 SF) than the entire Metro Phoenix market posted. It’s also the only submarket with 7 digits of sublease space inventory.
My team, The Coppola-Cheney Group, is working on over 150 real estate transactions right now. If you want to understand the market more and make better decisions, give me a call.