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May 18, 2024
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Phoenix Office Rental Rates Rise, Despite Increasing Vacancy Rates


Market Highlights

• New availability rates continue to grow, currently at 21%.
• Leasing activity fell 35% YOY to 1.95M SF.
• Sales volume fell 8% YOY to 1.2M SF.

Market Drivers

• Leasing activity fell for the fourth consecutive quarter, down roughly 35% year-over-year (YOY), resulting in the lowest period of activity since 4Q20. Total vacancies continue to rise and now stand at 18%, a 30-basis point (bps) increase quarter-over-quarter (QOQ). Smaller office product -in particular offices under 50k sf - are generating consistent tenant demand. Vacancy rates for sub 50k sf office product have remained steady over the last two years sitting between 8.7% and 9.8%.
• Despite the rising vacancies and weaker tenant demand, Phoenix average rental across the valley have held strong resulting in a 3.7% gain YOY.
• 2023 resulted in a 10-year record low of 5.4 msf of office properties trading hands due to economic uncertainty and rising interest rates. Sales volume fell again by 8% to 1.2 msf from the 1.3M SF reported in 1Q23.

Economic Overview

• According to the Arizona Office of Economic Opportunity, Phoenix metro’s unemployment rate in February increased 10 bps YOY to 3.3%. This is compared to the state’s unemployment rate of 4.1% and national rate of 3.9%.
• The Phoenix metro continues to excel as one of the nation’s top performing markets for employment growth. The Bureau of Labor Statistics’ preliminary data for February 2024 shows total nonfarm employment throughout the metro area grew 2.2% YOY. The Phoenix metro area ranks within the top ten of the nation in nonfarm employment growth in the last year.

Near Term Outlook

• Vacancy and availability rates are expected to rise throughout 2024 due to upcoming lease expirations and weakening office fundamentals. It is anticipated that businesses will likely downsize their office footprint with the growing popularity of hybrid work models coupled with economic uncertainty. Demand should remain strong for smaller office suites, as over 60% of all 1Q24 office lease transactions ranged from 1-5k sf.
• Despite recent challenges, the economic outlook for the Phoenix market remains positive in the long run. Forecasts expect the region’s population, job market and personal income to grow, but at a moderated pace when compared to prior years.

The information in this report was composed by the Kidder Mathews Research Group and provided by Kidder Mathews Director of Research Gary Baragona

Data sources: CoStar, AZ Commerce, Arizona Labor of Statistics, AZ Big Media, Phoenix Business Journal

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