While the Phoenix office market softened a bit going into Q4 2021, there are still reasons to be hopeful, according to a report from Transwestern Real Estate Services.
The office market showed positive net absorption in Q4 for the first time since the onset of the pandemic. Leasing activity continues to gain momentum, and investment activity saw another strong quarter. Vacancy rates are beginning to recede, though slowly, they are moving in the right direction. Asking rents showed a slight upward trend in the Phoenix MSA, only two submarkets posted a drop in rental rates. Tempe showed a marginal decline in overall rental rates but also posted record breaking rents over $50/SF in Q4 for the newly completed 100 Mill building. A slowdown in new construction should put less pressure on vacancy rates compared to previous quarters. The highest vacancy rates can still be found in the CBD: Downtown, Midtown and Camelback corridor, as leasing preference shifts to the new Class A product being delivered to the Tempe submarket. The CBD is still expected to rebound, although there may be a delineation between industry types by submarket, with Tempe becoming highly technology centered and the CBD remaining mostly professional services.
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“While Omicron brought with it some trepidation about the stability of the office market in Phoenix, Q4 2021 actually ended on a positive note with net absorption falling into the positive category for the first time since the pandemic began. As we are well into Q1 2022 now, we are seeing absorption dip into the negative again. An uptick in sublease space is primarily responsible for that reversal.” said Jennifer Barili, Senior Researcher and Analyst at Transwestern. “There are still lots of positive signs though, $50/SF rents are spreading outside Tempe and into other areas of the market, rents in general are rising and there is still a good amount of leasing happening around the valley. The market won’t turn over in just one quarter or even just one year, but as long as fundamentals are moving in a positive direction incrementally, it’s a really good sign.”
Phoenix unemployment rate remains near historic lows, but overall job growth slowed in Q4 due to continued COVID anxiety. The Phoenix area has recovered most of the jobs lost in the first few months of the pandemic. The unemployment rate in Phoenix dipped to 2.8% in November 2021, a level not seen since the months immediately prior to the Great Recession. Overall, Phoenix is still projected to be among the fastest growing job markets in the country for the next decade.
Download the full fourth quarter 2021 Phoenix office market report here.
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