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June 15, 2024
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Headwinds Persist in Phoenix Office Recovery


This report was provided by real estate services firm JLL

The latest numbers on the Phoenix office market as provided by the Phoenix Office of JLL point to a continued rise in negative net absorption and sublease inventory. The report – JLL’s Q3 2023 Phoenix Office Insight - also notes ongoing demand for highly amenitized office space, positive operating fundamentals for newer Class A and Trophy buildings, and an increase in return-to-work efforts by many companies near the end of the quarter.

According to the report, metro Phoenix recorded more than 1.5 msf of negative net office absorption during the third quarter, almost double the loss in the previous quarter. New sublease space also continued to soften the office sector, increasing the total local office vacancy rate to 25%.

Though the overall outlook for office real estate in Phoenix remains cautious, the report highlights several positive trends, including the continued popularity and performance of highly amenitized properties, and lease activity that buoyed the performance of the Camelback Corridor, Chandler, South Tempe and Scottsdale. Demand from relocating and expanding companies also had a positive effect on rental rates.

"The Phoenix economy compares positively against many other U.S. cities,” said JLL Senior Managing Director Ryan Bartos. “That has contributed to a historic rise in the market’s overall direct office rents, which now sit above $30 per-square-foot. Rents are trending even higher in prime areas such as the Camelback Corridor, where projects like The Grove and renovations at The Esplanade and Bond reflect a continued flight to quality.”

Bartos notes that tenants are still navigating the shifting tides of work preferences. “Some businesses are content with their current spaces and some are downsizing in response to work-from-home and hybrid work scenarios. But many others continue to take a 'wait and see' stance,” he said. “Remote job postings have decreased 60% year-over-year – one force that could help move companies off of 'wait and see,' and slowly but steadily bring the Phoenix office sector back to a more normal footing."

There are a number of factors that could persist in negatively impacting the market, the JLL report notes, including further slowdown in national economic growth, continued inflation and elevated interest rates. A low level of new office construction and interest from smaller tenants is expected to alleviate some volatility in office vacancy rates, though recovery to pre-pandemic levels will take time as headwinds persist.

This report was provided by J.C. Casillas, Managing Director, Research, JLL

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