The Valley’s office market continues to see rising vacancy rates across the metro, again setting a decade-high total vacancy during the third quarter. Phoenix recorded a total office vacancy rate of 18.5% and a sublet vacancy rate of 5.9% - bringing the total vacancy rate to 24.4%, which equates to 23.3 million square feet (sf) of total vacant space.
The ongoing escalation of sublease space throughout the Phoenix metro is the predominant factor propelling the increase in overall vacancy. With hybrid and remote work models becoming a new normal for traditional office employees, businesses continue to reorganize their portfolios by subleasing under-utilized office space at a record rate.
“While the Phoenix office market continues to navigate high vacancies and economic headwinds, there were a few bright spots in the third quarter. Rents for class A space continue to rise, and we saw a substantial increase in the sales transaction volume quarter over quarter. Notably, the price per square foot on these sales jumped 13% to $186.14psf despite increasing interest rates impacting cap rates and investor demands. It will take a while to absorb all the vacancy on the market, but it isn’t all doom and gloom in the office world, and Phoenix is well-positioned to bounce back faster than many other markets,” said David Genovese, Avison Young Principal and Managing Director – Phoenix.
Direct asking rents for Phoenix office space increased for a second consecutive quarter – jumping $0.18/sf (0.62%) from $29.05 to $29.23 quarter-over-quarter. Rents have continued to increase despite an evident lack of demand, as owners have opted to conserve the value of their investments by keeping rents high and, in return, sweetening the pot during negotiations by providing significant concessions by way of extended free-rent periods and higher-than-average tenant improvement (TI) allowances. Increased asking rates can also be attributed to the willingness of prospective lessees to compete for high-end/highly-amenitized space to attract workers back to the office.
Office property sales volume in Q3 was $225,992,142 – a significant increase of $82.7m (57.7%) quarter-over-quarter. The average price per sf on all transactions also rebounded in the third quarter, rising from $164.73/sf in Q2 to $186.14/sf in Q3 – a 13.0% increase quarter-over-quarter.
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