The Greater Phoenix office market, like nearly all large cities across the nation, is struggling with negative net absorption in the post-pandemic economy. Despite negative net absorption totaling -1.7 million square feet during 2023, the Phoenix market continues to experience rising office rental rates, according to a report released by Colliers in Arizona.

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Net absorption for fourth quarter 2023 was -177,760 square feet, despite strong leasing activity.  Negative net absorption in Class A assets represented 77.7 percent of the total loss of absorption for 2023.  More than 85 percent of the negative net absorption took place in three submarkets, Tempe, Deer Valley and Downtown North.  Tempe contributed -802,009 of the -1.7 million square feet in negative net absorption last year. 

Leasing activity was relatively healthy at the end of the year with the number of direct leasing transactions relatively comparable to fourth quarter of 2022.  The largest lease of fourth quarter was the nonprofit company Peckham signing a lease for 136,194 square feet at 3150 S. 48th St.  This was followed by the expansion of Northrop Grumman agreeing to occupy 119,222 square feet at Gilbert Spectrum, a new project expected to deliver late this  year.

Direct vacancy rose during the fourth quarter to 14.9 percent, marking a 20 basis point increase quarter-over-quarter.  Total available space (direct and sublease combined) rose 70 basis points year-over-year to finish at 19.4 percent.  The pace of large sublease spaces reaching the market slowed during fourth quarter.  No new subleases over 100,000 square feet were added in the last three months of the year.  There were 22 new subleases over 10,000 square feet contributed to the market with an average size of 21,097 square feet.  These types of spaces are typically the quickest to lease, with an average time on market of only 3.5 months.  Tempe and Chandler were the only two submarkets with more than one million square feet of sublease space available.  Deer Valley experienced the largest decrease in vacancy year-over-year, falling 340 basis points to 16.1 percent.  Tempe experienced the largest increase in vacancy during 2023, rising 420 basis points to 17.2 percent. 

Despite the rise in vacancy, rental rates held strong in the office market, increasing 1.09 percent during fourth quarter and 2.6 percent during the entirety of 2023.  The average asking rate finished the year at $29.66 per square foot.  Class A assets posted the largst increase during 2023, up 3.2 percent and finishing the year at $32.61 per square foot.  The highest rental rates in the market are found in Class A assets in the Camelback Corridor, where year-end average rates were $41.05 per square foot.  Downtown South was the only submarket that posted a rental rate decline in 2023, with an overall decrease of 2.5 percent, ending at $31.58 per square foot. 

During fourth quarter 2023, only one new building was completed, adding 150,000 to inventory.  The building was the third structure completed at the Cavasson master planned development and is 50 percent pre-leased to Meritage Homes.  New deliveries of office buildings totaled 740,128 square feet in 2023.  At the end of 2023, there were a total of 757,273 square feet of new development under construction.  The volume of new office construction is expected to remain low through 2024 as we work to absorb vacancy. 

Investment sales volume of office properties rose during fourth quarter to $268 million, elevating 5.1 percent compared to third quarter.   This was the highest performing quarter of the year, which helped complete a total sales volume in 2023 of $935 million.  This marks a 62.8 percent decline compared to 2022.  The average price per square foot during fourth quarter was $213 and the average price paid during 2023 was $216 per square foot.  Scottsdale Airpark led the quarter for highest sales volume with three transactions totaling $48.9 million.  The top transaction for the quarter was a three-building office park in Deer Valley totaling 252,350 square feet.  The $46 million transaction involved ViaWest Group as seller and Big Sky Medical Real Estate Group as buyer.

Colliers anticipates that employers and employees will continue battling over working remotely or in the office.  The result of this struggle has been a trend toward enticing employees back with new offices in high-end buildings with appealing amenities.  Many of the office buildings are beginning to resemble and function like luxury hotels.  The demand for such amenities, as well as elevated construction costs, has pushed tenant improvement allowances over $120 per square foot.