Phoenix office market experiencing record-high sublease availabilities

Above: The Tempe City Council has voted to approve the entitlements for the new 250 Rio office and retail project proposed by Hines in downtown Tempe. Real Estate | 5 Jul |

The Phoenix office market continues to experience record high sublease availabilities in second quarter, according to a report from Kidder Mathews.


READ ALSO: Here’s what is fueling the Tempe economy


MARKET DRIVERS

• Although leasing volume picked up over the last year, the office market experienced a weakened demand in the second quarter, down almost 37% since Q1. Sublease availability reached an all-time high of approximately 6.1M SF, nearly triple the amount since the start of the pandemic, a number the market has never experienced.

• The construction pipeline has slowed this year and new deliveries are expected to be lower in volume when compared to the last few years, expecting to end the year at 2M SF of projects coming online. The Phoenix office market can benefit from the slower pace of construction which will reduce the risk of significantly higher vacancies. However, the new supply coming online will still outpace the slow demand in the next year.

• Office investment in the Phoenix market has generally been in line with recent trends, however, sales volume dipped YOY to 1.7M SF. Investors continue to seek out single tenant properties net leased by strong credit tenants, as well as medical offices that offer stability and safety among the uncertainty surrounding the onset of the foreseeable recession.

ECONOMIC OVERVIEW

• According to the Arizona Office of Economic Opportunity, Phoenix metro’s unemployment rate in May decreased 200 basis points YOY to a 20-year record low of 2.9%. This is compared to the state’s rate of 3.2% and national rate of 3.6%.

• The Phoenix local economy remains among the best-performing markets for job growth and was recently ranked 4th in the nation for best performing metro. Additionally, the market has welcomed many new residents into the labor force. From July 2020 to July 2021, Phoenix reported the largest numeric change in its population compared to other U.S. cities with 50,000 people or more, adding 13,224 new residents.

NEAR TERM OUTLOOK

• Many companies in the valley have started to map out their “return-to-office” plan, and office space is still needed among tenants as going completely remote is not an option for many. Companies are trying to find the work-life balance for their employees, thus continuing the trend of migrating to the suburban market closer to where their workers live.

• Office rents in Phoenix are going up at one of the fastest rates in the nation and may be an indication that sublet space has minimal effect on the market as a whole. Landlords have been more open to concessions in exchange for longer lease terms but holding firm on prices, though it may see a turn in the coming year as the recession concerns are monitored.

MARKET HIGHLIGHTS

RENTAL RATES hit a record high of $28.92/SF on a full-service basis.
SUBLEASE AVAILABILTY soared to a new high of 6.2M SF
AVG PRICE PER SF decreased YOY ending at $200/SF

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