The Greater Phoenix office market posted its highest net absorption in two and a half years, as well as a decrease in vacancy, according to a report released by Colliers. The Southwest city’s decreased construction activity added the lowest level of new office inventory in more than 10 years.
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Net absorption during the last three months of 2024 was stimulated by owner user acquisitions. Three acquisitions totaling more than 600,000 square feet included facilities for U-Haul, Cardon Ventures and D.R. Horton. Fourth quarter posted 358,118 square feet of positive net absorption, bringing the total year net absorption to -928,923 square feet. Office leasing activity gained momentum with more than 500,000 square feet of new direct leases signed during fourth quarter, marking a 33.4 percent increase compared to fourth quarter 2023. Five of the Valley’s submarkets contained 53 percent of the leasing activity, led by Tempe, Chandler and Downtown South. The largest direct lease signed during fourth quarter was Barrett Financial Group agreeing to occupy 52,608 square feet at Insight’s headquarters building in Chandler.
The direct market vacancy decresaed for the first time in a year and a half, falling to 15.3 percent. However, vacancy rose year-over-year by 40 basis points. Total space available rose 10 basis points year-over-year to finish 2024 at 19.5 percent vacancy. The largest decreases in direct vacancy were in Downtown North, Tempe and Scottsdale Airpark. The largest increases in direct vacancy were experienced in South Tempe/Ahwatukee, Chandler and Airport Area. Currently there are 58 office buildings in the market containing more than 100,000 square feet of direct vacant space. These spaces total 9.3 million square feet and account for 37 percent of the entire market vacancy. Sublease availability decreased 4.4 percent during fourth quarter, marking the third consecutive quarter of decline and an 8.5 percent decline compared to fourth quarter 2023.
A look at the Phoenix office market
Overall office rents are holding stable with a slight 0.98 percent increase year-over-year. Class A assets are performing the best in the market, posting a 3.2 percent increase in rates year-over-year to $33.66 per square foot. Rental rates in Class B assets decreaed 1.09 percent year-over-year and Class C asset rates dropped by 2.8 percent. While Class A starting rates are showing steady growth, Colliers tracking indicates there was a 3.9 percent decline between the “effective rate” and the “starting rate” with an average term of five years. This demonstrates that concessions in the form of rent abatement or grow-in structures are being implemented. The newly renovated spaces at The Esplanade in Camelback Corridor have set a new high-water mark for rental rates, hitting $60.00 per square foot during fourth quarter 2024.
Last year marked a very low level of office deliveries for the Phoenix office market with just 496,616 square feet added to inventory. During fourth quarter 115,136 square feet were completed. One Scottsdale Medical developed by Ryan Companies was the largest project finished during the quarter, adding 101,136 square feet. One building was started during the fourth quarter, the 77,000-square-foot build-to-suit for Fender Musical Instruments at “PV” by RED Development. During fourth quarter, George Oliver and Ascentris acquired the final piece of an assemblage on the northeast corner of Indian School and Scottsdale roads. Design concepts are underway for this site, which totals nearly six acres.
Investment sales volume of office properties was the strongest in eight quarters, reaching $559 million. The market posted a 64.6 percent increase quarter-over-quarter and more than doubled sales volume compared to fourth quarter 2023. Total sales volume during 2024 reached $1.47 billion, which was a 57.7 percent increase compared to 2023. While volume was higher, the year brought more value add and owner user sales that dropped the average price per square foot by 5.51 percent. A transition occurred in the investment market during fourth quarter, where Class A office sales were predominantly led by private investors as opposed to institutitional capital. The two largest transactions of the quarter were in the Camelback Corridor submarket.
Both assets were acquired by private investors. They include 24th at Camelback II, purchased by Roger Norman for $97.2 million, and Camelback Lakes, acquired by an entity tracing back to Arte Moreno for $60 million. Many bullish developers are eager to locate distressed, underperforming office buildings for conversion to industrial usage, especially within infill locations.
The outlook for the Greater Phoenix office market shows signs of more activity as companies previously sitting on the sidelines step in to make decisions. Several companies that needed to make critical office space decisions had paused until after the election. As more employers mandate a return to office either full-time or on a hybrid schedule, numerous companies have expressed that their current footprint could not accommodate the requirements. This will likely put upward pressure on Class A rental rates and decrease vacancies since the market is lacking new supply.
