The Metro office market continues to trudge along its own path of an extended (up and down, circular) recovery. Direct vacancy actually decreased slightly to 17.5%, 500 basis points lower than our 20-year average. Meanwhile, average asking rates actually increased by $0.46/SF per year between Q3 and Q4. However, net absorption, the most critical indicator of market health, posted a meager 123,048 SF in Q4, making the cumulative figure for 2022 at 775,813 SF. This is roughly half of the 1.6 million SF per year Metro Phoenix normally absorbs.
What’s going on in the market? Well, the market is patiently waiting (while building owners, management, and leaders are not so patient), for companies to figure out their work plan. It is managing to stay relatively steady without a major correction. The good news here is only 551,000 SF of new product are under construction. It all delivers in 2023 and there is nothing currently in the pipeline to deliver in 2024. Yes, we have a lot of sublease space (6x more than in 2019), but it is becoming direct space very gradually, 1% – 2% per year.
What’s going on in the market? Well, the market is patiently waiting (while building owners, management, and leaders are not so patient), for companies to figure out their work plan. It is managing to stay relatively steady without a major correction. The good news here is only 551,000 SF of new product are under construction. It all delivers in 2023 and there is nothing currently in the pipeline to deliver in 2024. Yes, we have a lot of sublease space (6x more than in 2019), but it is becoming direct space very gradually, 1% – 2% per year.
All-time high construction pricing is causing rental rates to either hold or increase depending on the submarket. For a prediction on when construction pricing will come back down to earth, check out my C2 Ten on One podcast with James Murphy of Willmeng.
What are tenants doing? Tenants under 10,000 SF continue to be the most active. They need to survive and have the most clarity. And right now, they are going to quality locations with great amenities. Companies sized between 10,000 SF and 30,000 SF are gradually coming to market for more than just a one-year renewal. (Some of these groups are currently in 50,000 to 80,000 SF). And for tenants greater than 30,000 SF, they are spending a ton of time planning, forecasting, experimenting, and doing a lot of asking their peers “what are you all doing with your space?” But only few of them are currently signing long-term leases.
Below is a link to our Lee & Associates Arizona Fourth Quarter 2022 Office Report, and as usual, here are my top takeaways:
The Camelback Corridor Comeback– After struggling for several years attracting a high volume of tenants, the Camelback Corridor posted 351,000 SF of net absorption for 2022. Only the Chandler submarket did better. Camelback is full of smaller F.I.R.E. Industries and floor plates that accommodate groups as small as 1,500 SF, all day long.
Spec Suites Reign– With the majority of active companies in the market demanding 10,000 SF or less, successful landlords are building large batches (6 to 10 at a time) of spec-suite, or pre-built suites (IF they have the reserves or can raise additional equity). Even at a premium, tenants will pay for something ready today at a defined price, rather than wait for a buildout.
Sublease Inventory Hasn’t Stopped Increasing– Sublease inventory as of Q4 2022 hit 6.8 million SF. One year earlier that figure showed 4.5 million SF. Metro Phoenix won’t have to deal with this inventory all at once, but it will take a long time to process this strong market force.
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.
What are tenants doing? Tenants under 10,000 SF continue to be the most active. They need to survive and have the most clarity. And right now, they are going to quality locations with great amenities. Companies sized between 10,000 SF and 30,000 SF are gradually coming to market for more than just a one-year renewal. (Some of these groups are currently in 50,000 to 80,000 SF). And for tenants greater than 30,000 SF, they are spending a ton of time planning, forecasting, experimenting, and doing a lot of asking their peers “what are you all doing with your space?” But only few of them are currently signing long-term leases.
Below is a link to our Lee & Associates Arizona Fourth Quarter 2022 Office Report, and as usual, here are my top takeaways:
The Camelback Corridor Comeback– After struggling for several years attracting a high volume of tenants, the Camelback Corridor posted 351,000 SF of net absorption for 2022. Only the Chandler submarket did better. Camelback is full of smaller F.I.R.E. Industries and floor plates that accommodate groups as small as 1,500 SF, all day long.
Spec Suites Reign– With the majority of active companies in the market demanding 10,000 SF or less, successful landlords are building large batches (6 to 10 at a time) of spec-suite, or pre-built suites (IF they have the reserves or can raise additional equity). Even at a premium, tenants will pay for something ready today at a defined price, rather than wait for a buildout.
Sublease Inventory Hasn’t Stopped Increasing– Sublease inventory as of Q4 2022 hit 6.8 million SF. One year earlier that figure showed 4.5 million SF. Metro Phoenix won’t have to deal with this inventory all at once, but it will take a long time to process this strong market force.
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.
Andrew
602.954.3769
acheney@leearizona.com
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Click here to read the Q4 Office Market Report.
