The Greater Phoenix Office market experienced a small step backwards in net absorption in Q2, going negative 78,000 SF. However, the situation isn’t as completely dismal as the number suggests. A closer look shows that sublease inventory went down by 300k SF. That’s a step in the right direction. Whether tenants leased sublet space or that space became direct space, a decent amount of space was leased. This shows the office market is recovering — and that it will take a while.
Vacancy and lease rates essentially stayed flat. Direct vacancy bumped up to 19.8% from 19.6%. Adding in sublease inventory, overall vacancy gets to 25%. At that level, one would expect lease rates to lower more significantly than the 4 cents/SF they did in Q2. With construction pricing remaining high, sustained lease rates are one of the few mutually acceptable ways landlords and tenants can cover those costs.
Here is a link to the Q2 Report and as always, here are my three takeaways:
— The overall theme is that it’s a tenant market: There are pockets of trophy space where landlords have more leverage. But at 25% total vacancy, most landlords are competing for tenants.
— The road to recovery is long: The return to the office is all around us in news headlines, anecdotes, and parking counts. If you’re a landlord, stay patient, and thoughtful. If you’re a tenant, take advantage as best you can.
— Construction costs remain a challenge: For both new building construction and tenant improvements, high construction costs post challenges. For new builds, it’s tough enough to finance buildings, and then when you slap on 25% over historic norms, the project dies. High tenant improvement costs can be so restrictive, it’s effectively holding tenants hostage in their existing location, or, if they don’t want to move, in their existing configuration.
If you’re exploring the market—whether you’re downsizing, upsizing, or just trying to stay ahead of the trends—let’s connect. We’re here to help. Check out my video above or the Q2 2025 market report below to get all the details.
