The Phoenix office market is on track to suffer from its worst year of net absorption on record. A third consecutive quarter of negative absorption (-740,026 SF) brought the year-to-date total to -2.1 million SF. This is the most negative absorption in our history and we still have Q4 to go. Direct vacancy increased to 19.9%, assisted by sublease space expiring, and becoming direct vacancy.
The net numbers tell us office tenants are not done shedding space in response to work from home, a potential recession, inflation, etc. We don’t know when this will pass but we see it continuing into 2025.
Now some positive news: Gross leasing numbers (people moving from one space to another and renewing), tell us that some companies have figured it out and others even expanded (check out this article from the Phoenix Business Journal on one of my local leasing assignments here). Gross leasing activity reached 7.5 million SF as of Q3, on track to hit 10 million SF. Greater Phoenix also posted 10 million SF of gross leasing in 2019, when net absorption reached positive 3.9 million SF. Great buildings with lots of amenities are doing ok while the rest of the market is doing poorly.
Below is a link to our Lee & Associates Arizona Third Quarter 2024 Office Report, and as usual, here are my top three takeaways:
— Tenant Improvement Costs Skewing Expectations: Given the toxic amounts of negative net absorption, tenants would expect deep leasing discounts EVERYWHERE they look in the market. The challenge is that heavily inflated construction costs have not softened. And they certainly don’t match the underwriting created five years ago. Thus, when a tenant improvement project that a landlord told their lenders and partners would cost $60/SF, actually runs $120/SF, higher lease rates and sometimes extended terms are the only way to solve the problem.
— Downsizing Happening Most Everywhere: Aside from a few outliers, there is no submarket, nor any class of building (A, B or C), where rightsizing (aka downsizing) has not occurred. This will lead to better opportunities for tenants ultimately.
— One Size Does Not Fit All: Hybrid is a very subjective word these days when it comes to work models. The frequency employers can get (versus ask) employees to collaborate in person varies across industries and even across divisions of the same company. Just like there is no one-size-fits-all diet for humans, there is no such thing for businesses.
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.
602.954.3769
acheney@leearizona.com
P.S. Check out Episode 63 of Land to Lots™ where my partner Craig Coppola highlights his ’12 Rules for Living a Fantastic Life’ linked here. This is Part 1 and Part 2 will be released on November 14, 2024.
Office Market
Click here to view the full report.
Click here to view the full report.
