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10/07/24
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Thia report provided by real estate services firm Kidder Mathews
Market Highlights
• Availability rates continue to grow, currently at 28.2%.
• Quarterly leasing activity fell 34.1% YOY to 941k sf
• YTD sales volume spanned 4.1 msf, surpassing 2023’s total.
MARKET DRIVERS
• Despite an increase in vacancy rates and limited demand for office spaces, average asking rental rates grew slightly quarter-over-quarter (QOQ) and by 3.2% year-over-year (YOY), likely due to an increase in operating expenses.
• Total office leasing activity has decelerated QOQ by 43.8% to 941k sf. Further contributing to the consecutive trend of negative direct net absorption since 2Q23. Total vacancies continue to rise and stand at 25.7%, a 190 basis points (bps) increase YOY.
• Smaller office buildings (sub 50k sf) are showing a vacancy rate of 12.2% YTD, outperforming their larger competitors. While the flight to quality trend continues post-pandemic, rising rental rates in premium Class A buildings are causing tenants to explore more affordable options in both adjacent buildings and submarkets.
• Total availability increased 70 bps QOQ, however, subleasing availability dropped by 40 bps QOQ. Market wide sublease activity led to positive sublease absorption of 238k SF compared to the quarter’s negative 980k SF of negative direct net absorption.
• YTD sales volume in the Phoenix office market has surpassed 4 msf, exceeding the total sales volume of 3.2 msf in 2023.
ECONOMIC OVERVIEW
• According to the Arizona Office of Economic Opportunity, Phoenix metro’s unemployment rate in August decreased 50 bps YOY to 3.1%. This compares to the state’s seasonally adjusted unemployment rate of 3.4% and national rate of 4.2%.
• In September 2024, the Federal Reserve issued their first rate cut since March 2020, responding to signs of inflation trending downward and a tightening labor market. This cut is speculated to have a modest positive effect on financing and refinancing for both new and existing properties, as the cost of borrowing decreases and liquidity improves
NEAR TERM OUTLOOK
• In the near term, upcoming loan maturities will present a potential risk as a large amount of CMBS debt will be maturing in the next 12 months, which may cause sales transaction activity to reaccelerate in mid-2025.
• There continues to be uncertainty moving forward throughout the office market
The information in this report was composed by the Kidder Mathews Research Group, led by Kidder Mathews Director of Research, Gary Baragona
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Data source: CoStar, AZ Commerce, Arizona Labor of Statistics, AZ Big Media, Phoenix Business Journal
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