1-Minute Phoenix Metro Office Market Update: Q4 2020

February 3, 2021
We are all getting mixed messages on office space use from the media and our own colleagues.  The office market is dead. It will never be the same. Work from home doesn’t work. The market will crash. We’ve already hit bottom. We hear all this and more every day.  We call it The Sandstorm.   What do you do in a sandstorm?  Get a real overview of your situation today and then stay in close contact with your broker every quarter over the next year.  The Sandstorm will continue and no one knows what’s going to happen next. In the meantime, I can report statistics for Q4 2020 and help my clients interpret them.  In Q4 2020, Metro Phoenix office leasing posted its second straight quarter of negative net absorption, at (269,254) SF.  We ended the year with a small amount of positive net absorption at 302,082 SF, which was down 92% from 2019’s figure of 3.9 million SF.  Available sublease space increased by 87,497 SF in Q4.  Lease rates increased slightly by $0.15/SF/YR, between Q4 2019 and Q4 2020.

However, it’s important to remember Metro Phoenix is a 106 million SF market.  Metro-wide direct vacancy only slightly increased in 2020, from 16.1% to 16.3%.  Sublease space did double in 2020, but that only resulted in an additional 1.2% of vacancy for the year.  The 20-year average in Metro Phoenix is 18% vacancy.  So, we have a healthy market, there is nominal new buildings under construction (2.8 million SF) and 35% of that is already preleased.  The only negative is a lack of tenants in the market looking for space.

What does all of this mean? It means that corporate America’s office space demand is on hold, but has not gone away.  The market has softened, but for now, has not suffered a major correction.  Companies will come back to the office, depending on when the vaccines suppress COVID 19 to an acceptable level.  We just don’t know when exactly that will happen.  We are optimistic that we will see some movement back to a normal market during this year as the vaccine inoculations get established.

Below is a link to our Lee & Associates Arizona Fourth Quarter Office Report, and as usual, here are my top takeaways:

1. Sublease Inventory Increased at a slower pace in Q4–  Subleases give us some clues to where the market will head. There was 646,000 SF of sublease space added in Q2 of 2020. In Q3, 438,000 SF was added.  In Q4, only 87,000 SF was added. This dip in pace of additional sublease inventory suggests vacancy and supply will not spike up in 2021.

2. The Office Market is softening everywhere, but to different degrees–   With negative absorption occurring over the past two quarters, demand is markedly down. But the Metro Phoenix office market has not broadly softened.  There are submarkets that are still fairly strong while others have dropped off a cliff. The stronger submarkets such as Tempe and South Scottsdale have been able to hold rates fairly well, but concessions are noticeably increasing. Other submarkets are experiencing increased concessions and precipitous drops in lease rates.

3. Butterfly Recovery– Unlike the slow, anemic, but steady recovery from the Great Recession, we expect the COVID-19 recovery to follow the path of a butterfly’s flight — i.e. ups and downs.  This is due to the enormous amount of uncertainty in the way people work, the vaccine rollout, the political climate, and a potential recession.  Flexibility and patience will be key in making successful real estate transactions.

These are interesting times with new variables affecting the office world. 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.

602.954.3769

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