The Metro Phoenix Office Market continues to face significant headwinds in 2023. Net absorption, measured by the net change in physically occupied space, came in at negative 127,468 square feet in Q1. This means the office recovery took a step backward after realizing positive net absorption in the same amount during the last quarter of 2022. Direct vacancy increased only by 10 basis points to 17.6%. Sublease inventory reached an all-time high of 6.84 million, however, the rate of increase slowed down in the first quarter.
Taking a deeper look at the top five leases signed in Q1 provides conflicting signals. On the one hand, there were two leases signed for over 100,000 SF, which hasn’t happened since 2019. Large tenants (over 30,000 SF), especially those greater than 100,000 SF, have been hiding under their desks since the pandemic began. To see two large active groups shows that other needle movers may start to come out of hiding. On the other hand, three of the top five tenants went into sublease spaces. This is a reminder to us all, that at this pace, it will take a long time to absorb the enormous glut of sublease vacancy before direct vacancy starts to decline.
I expect there will be more mixed leasing news for the remainder of 2023 and into 2024. Many companies have simply not figured out their long-term office plan. In the meantime, my team is working tirelessly with tenants of all shapes, sizes, and geographies to help them get their office(s) right.
Below is a link to our Lee & Associates Arizona First Quarter 2023 Office Report, and as usual, here are my top takeaways:
Camelback Corridor Submarket Still Rolling- With high concentrations of amenities, proximity to executive housing and front stage F.I.R.E. industries, this submarket continues to attract the greatest amount of net new leasing. Camelback hit 115,938 SF in positive net absorption while the overall market went negative.
Construction Pricing Giving No Relief for Office TI’s…or Lease Rates-Typically when demand decreases, lease rate reductions follow. Soaring construction costs actually caused overall lease rates to increase in Q1. This rate increase, along with horse trading additional concessions, are some of the ways landlords and tenants are able to solve for the tenant improvement (TI) rising cost issue.
Debt is Coming Due-By now, you have probably seen many articles circulating about the risk of defaults for office buildings, and in some cases actual default. It’s important to understand the health of your landlord, especially when you are coming up for renewal or relocation. Analyzing the staying power and quality of Landlords has become a necessity.
As you can see, there are constantly changing nuances and opportunities all over the market. Regardless of your situation, I’m happy to discuss how I can position your company’s real estate better in this market.