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7/14/23
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This report was provided by real estate services firm Avison Young
Though demand for office space has dropped post-Covid with companies wrestling with the amount of space needed, Class A direct asking rates have continued to increase – rising $0.25 per square foot (psf) during the quarter to $29.05 psf. This increase is due to the willingness of prospective occupiers to compete for high-end office space with upgraded amenities in an effort to attract employees back to the office. Secondly, landlords appear to be providing tenants with more generous concessions at commencement, such as offering more flexibility in their leases, free rent periods, and higher tenant improvement packages, among other benefits.
“The Phoenix office market continues to try to reinvent itself and determine what it will be moving forward. Class A rents have been rising, building amenities are being enhanced, and demand for space is not as muted as in other major cities, with our direct vacancy sitting at 10-year averages. On the downside, sublease vacancy hit an all-time high, Class B and C space is seeing rents drop, and some buildings are trying to repurpose their use with demand not expected for the foreseeable future,” said David Genovese, Avison Young Principal and Managing Director – Phoenix.
Office vacancy has been climbing upward in the Valley, reaching a 10-year high in Q2. The primary driver of this increase was the surge in sublease space across the Phoenix metro. The direct vacancy rate had a negligible increase but essentially remained at 17.9%, which is only 30 basis points (bps) over the 10-year moving average of 17.6%. However, sublet vacancy ended the quarter at an all-time high of 5.7% - the highest on record and 339% higher than the decade’s moving average of 1.3%.
Property sales volume in Q2 was down from historical averages but improved upon numbers seen in Q1 this year – with four more transactions completed (19 total) and transaction volume up $32.6 mil quarter-over-quarter. Phoenix has averaged a quarterly transaction volume of $435.5 mil during the past decade, with Q2 down 67.1% when compared to the 10-year average. Though sales volume is down for office as-is the price paid psf, more owners are opting to repurpose their properties into more stable product types rather than sell in an effort to preserve the value of their property.
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