The Metro Phoenix Office Market hit a small speedbump in Q3 on the path to recovery. After posting a big net absoption in Q2 of +918,413 SF, Q3 slipped to -81,621 SF. This puts year-to-date net absorption at +532,634 SF, on track to finish well below our 20-year average of 2 million SF.
What’s going with this market? Aside from a few outliers, active office transactions remain on the smaller side. The third largest lease in the 108,000 million SF Greater Phoenix office market last quarter, was just 33,000 SF. Ask any office broker about their current workload, and it will consist mostly of transactions smaller than 10,000 SF, and a fraction over 20,000 SF.
Large office tenants (over 20,000 SF) continue their three (3) year planning uncertainty for growth and heck, even existing office requirements. Add escalating construction costs, an uncertain economy, and even getting their employees back in the office (a top three concern). Large tenants continue to either renew short term, or shed space, with a small minority moving to completely remote.
We find that smaller tenants under 20,000 SF want to work in the office, AND they want high-quality space. When they decide they want space, they also don’t want to wait. They are returning to offices where landlords have invested money in modernizing common areas and providing ready to occupy spaces — i.e. spec suites.
The market continues to recover, mostly one smaller suite at a time. Below is a link to our Lee & Associates Arizona Third Quarter Office Report, and as usual, here are my top takeaways:
F.I.R.E. Heavy Submarkets are on Fire– The Downtown, Camelback Corridor, and Scottsdale Airpark submarkets, home of the highest concentration of financial, insurance, and real estate (FIRE sector) are all leading the way in net absorption this year. The markets heaviest in tech firms (Tempe and Southern Scottsdale) are experiencing the highest amount of net absorption.
Lease Rates Continue to Climb– Average annual lease rates increased 5% in one quarter, jumping from $26.28/SF to $27.60. Higher rates are a key way landlords and tenants have coped with elevated tenant improvement costs (one of the top three biggest issues we face).
Sublease Space Hits A New All-Time High– Today the metro market carries 6.6 million SF of sublease space, an increase of 13.3% over Q2’s figure of 5.8 million SF. It will take some time for the market to absorb this all-time high glut of sublease space. Another top three issue.
There are 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.
Click here to read the full report.