Transaction volume in the Phoenix office market dropped to record lows at year-end, according to a report from Kidder Mathews. Here are some takeaways for the Phoenix market:

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MARKET HIGHLIGHTS

  • AVAILABILITY RATES hover near record highs at 20.2%.
  • LEASING ACTIVITY dropped to a 15-year low at 1.6M SF in 4Q.
  • SALES VOLUME fell to a 10-year low at 5M SF in 2023.

Market Drivers

  • Leasing activity slowed considerably in the fourth quarter, down approx. 20% YOY, dropping to a 15-year record low. Smaller-sized office product has shown a stronger resilience in terms of demand. While the broader market has experienced a consistent increase in vacancies over the last three years, buildings smaller than 50K SF have seen a reduction in their average vacancy rates since the pandemic began.
  • Although rent growth has slowed since early 2022 due to rising vacancies and weaker tenant demand, Phoenix rents across the valley have held strong as one of the best-performing markets in the country, recording almost 3% increase over the past 12 months.
  • Economic instability, combined with rising interest rates has resulted in a significant decrease in investment activities over the past few quarters, hitting a 10-year record low at year-end posting at 5M SF in 2023, compared to 10.6M SF in 2022.

Economic Review

  • According to the Arizona Office of Economic Opportunity, Phoenix metro’s unemployment rate in November increased 40 basis points YOY to 3.5% but decreased 40 basis points month-over-month from 3.9% in October. This is compared to the state’s unadjusted rate of 4.0%.
  • The number of companies moving to metro Phoenix is noteworthy, but the diversity of industries has helped sustain the region’s long-term stability. The businesses that Phoenix is attracting have evolved, and the market has emerged as a hub for advanced manufacturing, aerospace, logistics, and technology. 

Near Term Outlook

  • It is expected that vacancies and availabilities will continue to rise throughout the next year. As leases expire, many businesses will likely downsize their footprints given lower office utilization rates with the hybrid work model. Furthermore, the economic uncertainty presents further headwinds, potentially leading tenants to rethink committing to large and long-term leases.
  • The economic outlook for the Phoenix market is positive in the long run, despite expectations of slower growth compared to previous periods. The region’s job market, population, and income are all forecasted to grow at rates exceeding the national average, though at a moderated pace.

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

Data sources: CoStar, Arizona Commerce, Authorityt Arizona Labor of Statistics, AZ Big Media.