Phoenix office market stabilizes as sublease additions slow

Above: Playa del Norte. Real Estate | 27 Jul, 2021 |

The pandemic’s impact on the Greater Phoenix office market appears to have passed its peak with the market stabilizing in second quarter, according to a report from Colliers.  Sublease space additions to inventory have slowed and the market returned to positive net absorption following two quarters of negative activity, according to Colliers in Arizona’s mid-year office market report.

Arizona’s economy has been booming with record revenue growth, as well as personal income growth.  The state is projected to add 325,000 jobs in the next 12 months.  As pandemic restrictions have begun lifting, many companies have announced a full return of employees to the office after Labor Day.  Others are exploring a hybrid approach with some new work-from-home flexibility.  This all points to more office occupancy and a slowing in sublease space hitting the market.

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The Greater Phoenix office market posted 76,690 square feet of positive net absorption during second quarter.  This followed six months of negative net absorption. This move to positive absorption was largely due to two fully leased projects being completed that total 229,900 square feet. Nextiva finished its build-to-suit in Central Scottsdale and Banner Health completed its 128,000-square-foot facility in Arrowhead.  As companies return to the office, new deals over 10,000 square feet have increased 25.8 percent compared to first quarter and 70.5 percent year-over-year.

Sublease availability increased again this past quarter, peaking at nearly 4.5 million square feet.  June posted the lowest amount of new sublease space in the past six months.  During second quarter sublease availability increased 393,368 square feet, amounting to a 9.7 percent rise over-the-quarter and 85.5 percent year-over-year. The largest sublease space added this quarter came from University of Phoenix offering a total of 433,813 square feet between two buildings at Riverpoint.

Phoenix direct office vacancy increased 20 basis points during second quarter and 150 basis points year-over-year to reach 14.0 percent at the mid-year point.  The Southwest market, which posted a 50-basis-point increase in vacancy year-over-year, maintains the lowest vacancy this quarter.  The Northwest submarket had the largest move-out during the past quarter as Cognizant vacated 140,000 square feet at Canyon Corporate Plaza. This propelled the Northwest to hold the highest vacancy in the Valley. Chandler posted the largest decrease in vacancy year-over-year, dropping 130 basis points to 11.2 percent.

Rental rates have remained steady, despite the downward pressure applied by discounted sublease space.  Average asking rental rates increased 0.36 percent to finish the quarter at $27.58 per square foot. Class A rates were the only category that declined in price both over-the-quarter and year-over-year. Class B assets posted increases for those same time frames. As the metro area expands its boundaries, rental rates in the suburbs are experiencing the largest increase,  Arrowhead, West I-10 andGlendale all posted rate increases over-the-quarter and year-over-year.

During second quarter 381,499 square feet of new office space was delivered to the market, which had 29.8 percent vacancy.  During the first half of 2021 Greater Phoenix has added 1,545,253 square feet of newly constructed office space.  Irgens completed its Playa del Norte project at Tempe Town Lake, which offers 93,125 square feet.  That fully vacant building marks the largest vacancy delivered during second quarter.  There are currently 16 office projects under construction totaling more than two million square feet.  Approximately 25.8 percent of the new space is pre-leased.  The 100 Mill project in Tempe is the largest single building under construction and reports a 50 percent pre-leased status. Tempe is the submarket posting the most construction, which includes the recent groundbreaking of Mortenson’s 183,526-square-foot speculative building.  The West I-10 submarket experienced the start of its first Class A project to be built since 2007. That two-building project will house the Goodyear City Hall.

Sales volume of office buildings totaled $466 million during second quarter, increasing year-to-date volume to $926 million. This is equivalent to more than 68 percent of the total volume in 2020.  Sales volume during second quarter was up 78 percent year-over-year, but down 1.4 percent over-the-quarter.  The median price paid per square foot increased to $196.  The largest transaction in the second quarter was the $43 million($385/SF) sale of 1715 N. McQueen Rd.  The 120,294-square-foot property was built in 2021 and is 100 percent leased to Northrup Grumman.  Chandler, Superstition Corridor and Scottsdale Airpark were the top three submarkets for sales volume, totaling $247 million and comprising more than 53 percent of total market volume over the quarter.

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