The Phoenix office market continues to experience record high sublease availability, according to a market report from Kidder Mathews.

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Market Highlights

  • Sublease availability hit an all-time high of 7.5 million square feet.
  • Rental rates reached a record high of $29.88/SF on a full-service basis.
  • Sales volume fell almost 60% YOY to 1.1M SF.

Market Drivers

  • Leasing activity picked up slightly in the past couple of quarters, although still 15%-20% below pre-pandemic levels. Smaller office buildings are seeing more activity in contrast to larger ones, as local businesses seek space with smaller footprints.
  • The amount of available sublease space soared to an all-time high of approx. 7.5M SF. Representing 3.8% of the total office inventory in the Valley, the sublease availability rate ranks Phoenix in the top five markets as most affected in the nation, including markets of at least 100M SF of inventory.
  • Although overall office investment activity has slowed over recent years, investors who are active seem to gravitate toward medical office buildings. MOB sales have made up almost 40% of the transaction volume in the first half of 2023.

ECONOMIC OVERVIEW

  • The diversity of industries and number of companies moving to the Phoenix metro has helped sustain the region’s long-term stability. The labor market remains strong, climbing to third in the nation for job growth as of May. Solid job gains with accelerated wage increases help to keep unemployment rates low.

NEAR TERM OUTLOOK

  • The transition of hybrid work in the long term has affected office users to reevaluate their footprints in terms of size requirements. It is expected that the trend to downsize and cut footprints to reduce overhead space will continue into the second half of the year.
  • The Phoenix office market will continue to face challenges throughout the second half of the year. Although the development pipeline remains modest, vacancies are still expected to rise in the coming quarters.

The information in this report was composed by the Kidder Mathews Research Group.