The Phoenix office market has made genuine progress over last quarter’s disappointing retreat by posting strong absorption and vacancy figures. Vacancy rates this quarter are the lowest since 4Q 2009 and absorption for the quarter is at the highest rate since 4Q 2006. Even with an anemic recovery and the of lack of new product, the Phoenix office market appears to be building momentum.

With all the good news, some challenges still persist. Commercial rental rates are still declining as significant vacancies remain. Business is still reluctant to hire and add additional space and uncertaintly in the market creates a wait-and-see approach which is detrimental to market momentum. One certainty is restored, inventories will begin to tighten, as they already have in several submarkets. Add to that, a significant amount of obsolete product that will need to be replaced will finally put pressure on rates to move higher.

Vacancy has dropped 90 basis points to 26.2%, down from 27.1% last quarter. Absorption has increased by 735,052 SF. This significant uptick is in stark comparison to over 300,000 SF decline of last quarter. The 44th St. and S. Tempe/Ahwatukee submarkets have both increased absorption by more than 100,000 SF each this quarter. Deer Valley Airport and Northwest Phoenix submarkets are struggling the most with absorption losses.

“Last quarter’s retreat took everyone by surprise. However, absorption has rebounded nicely and we’re expecting that momentum to continue throughout the remainder of the year,” said Matt DePinto, Senior Research Analyst with Lee & Associates.

Rental rates again retreated for the fourth straight quarter and for the past 16 out of 17 quarters to $20.41 PSF. Higher quarterly absorption rates will help to slow rate decline until a rising trend can take hold. Only 6 out of 28 submarkets have seen lease rate increases this quarter.

Sales activity posted a total of $182.2M in 122 transactions. Total dollar volume is down from last quarter’s $247M. Price per SF was reported as $103.72, also down from last quarter. Cap rates were calculated at 6.74%, down from 7.83% last quarter. Leasing activity remains well within historic norms for number of transactions at 382. That is an increase of 35 over last quarter. However, SF leased is down about 6% from last quarter.

The Phoenix office market is expected to see better outcomes as the year goes forward. With progress on macroeconomic questions such as long term interest rates and health care cost containment efforts, companies should begin to see stability returning to the market and should begin hiring at a quicker pace.

European economic concerns still continue to put stress on the overall economy, but local dynamics in this market are returning and should have a greater impact on the health of this sector.