Office space in Phoenix is down in Q3 2022, including net absorption and gross leasing activity. Rising vacancy rates result from lowered demand for office space in Phoenix as employers adapt to a workforce that no longer sees remote work as a perk but a standard benefit.
At 3.50%, Phoenix's unemployment rate is slightly lower than the national average of 3.7%. However, despite solid employment, vacancy rates continue to rise, and the number of new units under construction has sharply declined since the last quarter.
Despite unfavorable market conditions, some areas of the Phoenix submarket, specifically those in the tech industry, saw good growth and positive absorptions. However, pandemic concerns have also driven many tenants out of downtown and into the suburbs.
General Area Overview & Demographics
Phoenix is Arizona's capital and most populated city, with a population count of 1.6 million as of 2022.
The average age in the state is 34, and the median household income is $60,914. The largest industries in the state area are real estate and financial services, with manufacturing and health care coming in third and fourth, respectively.
Approximately 10% of the labor force are government employees—a high number as Phoenix is both the state capital and county seat.
Phoenix is located in the Sonoran Desert and receives the most sunshine of any major city on the entire planet. It has a typical desert climate, with hot, dry summers and short, mild winters. The city averages over 300 days of sunshine per year.
The city proper is divided into numerous urban villages, each with a unique identity and character. Despite its high population, urban sprawl means population density is relatively low, and offices are often spread out in neighborhoods and subdivisions.
Summary of Phoenix Office Space Performance in Q3 2022
Phoenix saw a negative net absorption at -2,205,534 square feet, with harmful activity in all but two of the most important real estate markets: Camelback and Tempe.
Phoenix also saw a decrease in leasing activity from 2,091,716 square feet in Q2 2022 to 1,511,437 square feet in Q3 2022 but also saw a slight increase in rental asking rates. The decreased leasing activity could be explained by the cultural shift to remote work, as employees opt for flexible working arrangements.
Additionally, the total amount of commercial office space under construction significantly decreased from last quarter by 60%. This decrease in construction space also coincided with vacancy rates rising from 20.6% in Q2 2022 to 22.2% in Q3 2022.
What Are Office Space Rents Like In Phoenix?
Average office space rents in Phoenix slightly increased to $29.97 per square foot in Q3 2022 from 20.6% in Q2 2022. Rental asking rates increased the most for Class A and Class C office spaces. Asking rates were the highest in the Tempe, Camelback, and Scottsdale submarkets, with averages of $37.70, $35.84, and $32.62 per square foot, respectively.
The submarket that saw the highest rise in office rents was Tempe, which jumped from $34.95 at the end of Q2 2022 to $37.70. Incidentally, Tempe also has the highest amount of completed new construction at 463,526 square feet and was one of two submarkets with positive net absorption this quarter.
Purchase & Leasing Activity
Overall gross leasing activity was down this quarter at 1,511,437—nearly a 20% decrease from last quarter. However, a handful of submarkets in Phoenix saw sharp upticks in gross leasing activity.
Specifically, the Camelback and East Phoenix submarkets saw increased gross leasing activity from 149,516 to 382,434 and 74,830 to 231,276, respectively.
Purchasing activity in the Phoenix office space market decreased from 3.0 million square feet to around 2.2 million square feet from 2021 to 2022. However, despite the lower purchasing rate, the average purchase price per square foot rose from $200 at the end of Q4 2021 to nearly $250.
The low leasing activity is likely a result of employers minimizing office space for remote work schedules. However, the uptick in some submarkets indicates that investors can still leverage high-quality Class A office space to get high rental yields.
Notable Office Space Deals in Phoenix in Q3 2022
Although leasing and purchasing activity was down on average this quarter, there was still some notable leasing activity, particularly in the Tempe and Camelback submarkets. Below is a quick list of major deals for Phoenix office space in Q3 2022.
- Caremark's 354,888 square-foot lCaremark'se Scottsdale submarket;
- Dish Network Service’s 74,550 square-foot leaService'stheast Valley;
- Sendoso’s 60,000-square-foot leaSendoso'selback; and
- BatchServices’s 48,054 square foBatchServices'st Phoenix.
Many of these leasing deals were in suburban areas and office parks. The pandemic has pushed employers out of crowded downtown Phoenix office space and into more residential areas.
New Office Space Development Activity in Phoenix in Q3 2022
Phoenix's overall office space inventory Phoenix'sificantly from last quarter, but the total office space under construction fell by nearly 60%. The Tempe submarket saw the most significant addition of new office space thanks to the completion of the 436,526 square feet “The Beam on Farmer” building.
Market Forecast for Phoenix’s Office Space Market in 2023
Like Phoenix'sets, the Phoenix office space market is transitioning. This quarter did have the completion of several notable construction projects, but it might take some time before market activity reflects these additions.
Rising vacancy rates reflect a trend that is likely to continue as employees continue to engage in remote work.
Generally, the office space market is split between downtown and the suburbs. However, as high rents and metro living costs push people out of crowded downtown, businesses and employees are more likely to flock to suburban areas.
Takeaways for Office Space Investors
The Phoenix market is in an exciting space currently as generally good growth indicators balance unfavorable market conditions in key submarkets. As a result, investors should focus on high-quality Class A office space in suburban areas—precisely, office space for tech companies.
The relatively low amount of new construction might give investors pause, as decreased demand for office space could delay these projects. Rising interest rates may also cause delays in financing new buildings. Investors already owning commercial properties in Phoenix should consider possibly subleasing space as more employers opt for flexible work-from-home arrangements.
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