The pandemic certainly took its toll on the Metro Phoenix Office Market in Q1. The numbers tell us it was the worst quarter since the Great Recession (2008): Net absorption (new office space taken by job growth) went negative for the third quarter in a row, at -550,000 SF; sublease space increased at the highest pace since the pandemic began (1 million SF added in Q1); and vacancy increased by 140 basis points to 17.7%. There is no question that a substantial number of companies feel they can get by with less office space, either due to working from home or a more agile work plan.
What remains unknown is how long this toll road of office disruption will really stretch. There were positive notes as well. The vaccine roll-out is going great in Arizona (1/3 of all Maricopa County residents have had one shot). Some sublease space being marketed was taken off the market. More companies began coming back to the office. Tour activity has picked up significantly in the first quarter.
The market continues to send us mixed messages every day. We call this The Sandstorm. As I mentioned last quarter, the best thing you can do in a sandstorm is get a real view of your personal lease situation, and stay in close contact with your broker. Below is a link to our Lee & Associates Arizona First Quarter Office Report, and as usual, here are my top takeaways:
Sublease Space Increased Dramatically in Q1– In all of 2020, the market added approximately 1.3 million SF of sublease inventory. In Q1 2021 alone the market added just over 1 million SF.
Lease Rates Declined– While average asking rates dropped only 20 cents/SF this quarter, it’s a trend that continued for the 2nd straight quarter, and it showed up more precipitously in striking rates.
Submarkets Heavy In Back Office and Tech, are Heavy in Sublease Inventory– These two user groups are widely known to believe they can be just as productive from home as at the office. Tempe, where abundant tech growth has driven up rates, holds the highest sublease inventory at 531,000 SF. Sky Harbor Tempe, heavy in back office users, is close behind at 500,000 SF. These two markets, along with the Scottsdale submarkets, account for 52% of the sublease inventory in Greater Phoenix.
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.
