Phoenix office market shows positive net absorption for first time since pandemic

While the Phoenix office market has softened a bit in Q4 2021, there’s still reason to be hopeful, according to a report by Transwestern Real Estate Services.

The office market showed positive net absorption in the fourth quarter for the first time since the start of the pandemic. Leasing activity continues to pick up steam and investment activity had another strong quarter. Vacancy rates are starting to drop, although slowly they are moving in the right direction. Asking rents showed a slight upward trend in Phoenix MSA, with only two submarkets showing rental rate declines. Tempe posted a slight decline in overall rental rates, but also posted record fourth-quarter rents of more than $50/SF for the newly completed 100 Mill building. A slowdown in new construction should exert less pressure on vacancy rates compared to previous quarters. The highest vacancy rates continue to be found in the CBD: Downtown, Midtown and Camelback corridor as rental preference shifts to the new Class A product delivered to the Tempe submarket. CBD is still expected to rebound, although there may be a delineation between industry types by submarket, with Tempe becoming heavily technology-focused and CBD remaining primarily professional services.

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“While Omicron brought some trepidation about the stability of the Phoenix office market, the fourth quarter of 2021 actually ended on a positive note, with net absorption falling into the positive category for the first time since the start of the pandemic. As we are now well into the first quarter of 2022, we again see absorption dipping into the negative. A slight increase in sublet space is mainly responsible for this inversion. said Jennifer Barili, principal researcher and analyst at Transwestern. “There are still a lot of positive signs, $50/SF rents are spreading out of Tempe and other areas of the market, rents in general are going up and there are still plenty of leases in the Valley. The market won’t turn around in a quarter or even a year, but as long as the fundamentals are gradually moving in a positive direction, that’s a very good sign.

Phoenix’s unemployment rate remains near historic lows, but overall job growth slowed in the fourth quarter due to lingering COVID-related anxiety. The Phoenix area has recovered most of the jobs lost in the early months of the pandemic. The unemployment rate in Phoenix fell to 2.8% in November 2021, a level not seen since the months immediately preceding the Great Recession. Overall, Phoenix is ​​expected to continue to be among the nation’s fastest growing labor markets over the next decade.

Download the full Q4 2021 Phoenix office market report here.

Jose C. Birney