Phoenix office market sees record sublease availabilities

Phoenix office market continues to see record second quarter sublease availabilities, according to a report by Kidder Mathews.


READ ALSO: Here’s what powers Tempe’s economy


MARKET FACTORS

• Although leasing volume has recovered over the past year, the office market experienced weaker demand in the second quarter, down nearly 37% from the first quarter. Sublease availability hit an all-time high of around 6.1 million square feet, nearly triple the amount since the pandemic began, a number the market has never seen.

• The construction pipeline has slowed this year and new deliveries are expected to be lower in volume compared to recent years, expecting to end the year with 2M SF of projects coming online. The Phoenix office market may benefit from a slower pace of construction, which will reduce the risk of a significantly higher vacancy rate. However, the new supply coming online will still exceed weak demand next year.

• Office investment in the Phoenix market was generally consistent with recent trends, however, sales volume fell year-over-year to 1.7 million square feet. Investors continue to seek single-tenant properties net-leased by strong-credit tenants, as well as medical practices that offer stability and security amid the uncertainty surrounding the onset of the foreseeable recession.

ECONOMIC OVERVIEW

• According to the Arizona Office of Economic Opportunity, the unemployment rate for the Phoenix metro area in May fell 200 basis points year-on-year to a 20-year high of 2.9%. This is compared to the state rate of 3.2% and the national rate of 3.6%.

• Phoenix’s local economy remains among the best performing markets for job growth and was recently ranked 4e in the nation for the most efficient metro. Additionally, the market has welcomed many new residents into the job market. From July 2020 to July 2021, Phoenix reported the largest numerical change in population compared to other US cities with 50,000 or more residents, adding 13,224 new residents.

SHORT-TERM OUTLOOK

• Many businesses in the Valley have begun to develop their “return to office” plan, and tenants are still in need of office space, as complete distancing is not an option for many. Companies are trying to strike a work-life balance for their employees, continuing the trend of migrating to the suburban market closer to where their workers live.

• Office rents in Phoenix are rising at one of the fastest rates in the country and may indicate that sublet space is having minimal effect on the market as a whole. Landlords have been more open to concessions in return for longer lease terms, but have remained firm on pricing, although that could see a turn in the coming year as recession concerns are monitored.

MARKET HIGHLIGHTS

RENTAL RATES reached an all-time high of $28.92/SF on a full-service basis.
AVAILABILITY FOR SUBLETTING climbed to a new high of 6.2M SF
AVERAGE PRICE PER SF decreased YOY ending at $200/SF

Jose C. Birney