We’re halfway through the year and the Metro Phoenix Office market continues to trudge along. I thought 2023 would be a much improved year for the office. However, net absorption went negative for the second quarter in a row, albeit by a small notch, only like in Q1. Net absorption is the net increase in physically occupied space, i.e. space needed for office jobs. It is the key indicator of the health of any type of commercial sector.
What makes the office market seem better than it is, at least in Greater Phoenix, the gross absorption has remained normal throughout the pandemic. Gross absorption is simply a measure of new leases signed, disregarding space vacated by a tenant. Having stable gross activity, but little net leasing progress, the office market feels more like Sisyphus pushing the boulder up the hill in Greek mythology, rather than a feel-good underdog story.
Here are the numbers:
Direct vacancy increased slightly to 17.7%.
Net absorption measured –137,097 SF in Q2 compared to 127,468 SF in Q1.
Bringing year-to-date absorption to -264,565 SF. (our 20-year average is 2.2 million SF/YR).
Average asking lease rates rose $0.44/SF/YR to $28.79.
Sublease inventory inched higher to 6.89 million from 6.40 million.
There remain unique opportunities for landlords and tenants in this odd office market. I spend my days helping both types of clients navigate their real estate problems. This 20-year industry veteran would be happy to solve yours too.
Below is a link to our Lee & Associates Arizona Second Quarter 2023 Office Report, and as usual, here are my top three takeaways:
Lease Rates Have Only Increased Since the Pandemic Started- The seismic disruption in office use still has not caused a correction in lease rates….YET! Construction pricing is the main culprit. It’s no fun for anyone involved in deal making, but there is no path around it. Tenants coming back today must have quality, improved space for their employees coming to the office. The only discounts in rents are found in sublease transactions, which typically come as-is, with no tenant improvement allowance.
The Market is NOT Overbuilt. But Recovery Will Still Take Time (maybe quite a long time)- Following the Great Recession, a glut of new empty buildings either became severely discounted or went back to the bank. The office market doesn’t have that same surplus in this cycle, but it does have a sublease inventory 3x the normal inventory. This will take years to absorb.
Buyers Can Get Some Nice Office Buildings For a Big Discount- I see two different sales markets. One market contains quality office buildings, stabilized with long-term tenants coming into the office. There are not a lot of discounts in this pool. The other market is much larger and offers quality office buildings with either high vacancy or debt coming due. Owners who don’t care to slog through a potentially long lease-up are offering some nice assets for big discounts.
My team, The Coppola-Cheney Group, is working on over 150 transactions right now. If you want to understand the market better and make better decisions, give me a call.
Andrew Cheney, CCIM, CRE, SIOR