Phoenix Office Market Resilient – Return-To-Work A ‘One Size Fits One’

Don T. Rodie, MCR, SLCR

Managing Director, Cushman & Wakefield

Phoenix was experiencing solid economic and commercial real estate fundamentals prior to the local impact of Covid-19, while this market has also performed well historically.

The Phoenix market has always been an appealing alternative for West Coast companies due to our business-friendly climate, lower cost of living for employees and significantly lower operating costs for employers. The market’s real estate sector is supported by a diverse range of industries, namely manufacturing, finance, professional service and healthcare. According to a June report from Oxford Economics, Phoenix’s diversity and strong underpinning of growth-oriented industry sectors increases its resiliency against the pandemic’s economic shocks and positions the area for a strong recovery in both GDP and employment. Additionally, overall affordability within the metro area in conjunction with strong job growth will continue to boost population growth.

At the end of 2019, vacancy in the Metro Phoenix office market stood at 16.6%, marking its lowest level since Q4 2007 (15.9%). During 2019, companies absorbed a robust 2.6 million square feet (MSF) of office space, reflecting one of the stronger annual net gains for a single year since 1999. Significant suburban takedowns included DoorDash’s 345,795 square feet (SF) at The Grand @ Papago Park and Carvana’s 347,850 SF sublease from State Farm in Marina Heights in Tempe. There were also numerous signings in downtown Phoenix, including WeWork (90,576 SF) and Ernst & Young (19,462 SF) at Block 23; Quicken Loans added 56,782 SF to their footprint at One North Central; and WeWork absorbed another 53,093 SF at the U.S. Bank Center.

But like countless other markets around the world, Phoenix has certainly felt impact from the pandemic. Phoenix recorded a loss of 138,600 jobs driving unemployment from 4.2% to 10.5% (July 2020). However, despite that grim statistic, office vacancy has remained buoyant for the most part increasing only minimally during the first half of 2020 to 18.2% (mostly due to construction deliveries). In addition, demand for space continued—although not at the same velocity—and the market actually saw 100,000 SF of positive absorption valley-wide during Q2 2020. Meanwhile, average annual gross full-service rental rates saw a slight uptick from $27.25 at year-end 2019 to $27.91 in the first half of 2020. We have also yet to see any meaningful increase in sublease space.

Office construction in Metro Phoenix was maintaining an upward trajectory at year-end 2019 with 1.7 MSF of new inventory in development. Of that amount, 1.3 MSF is still under construction as of today, with essentially all (1.2 MSF) expected to deliver before the end of 2020. Despite the pandemic, we did not see any real stoppage or even pause in new development already underway; however, we have not tracked any new significant office project starts since either.

While these statistics and trends suggest the Phoenix office market is somewhat stable, Covid-19 still presents us with a layer of opacity precluding any reliable forecast of future activity. Individual company culture and financial impact will determine the action each business takes regarding future occupancies.

Cushman & Wakefield has provided considerable and well-received thought leadership through our Recovery Readiness Task Force (RRTF) on emerging workplace strategy which has also garnered significant attention from many top news sources including CNBC, Wall Street Journal and numerous other reputable organizations. Cushman & Wakefield has captured more than 2.5 million data points from workers all over the globe in the pre-COVID-19 era and a further 1.7 million data points from more than 50,000 respondents in the current work from home environment through its proprietary “Experience per SF™ (XSF)” and “XSF @ Home” surveys/tools, and which global companies and their employees continue to help contribute responses.

I have participated in numerous discussions between a wide variety of companies, our RRTF leadership and our Global Occupier Services executives where we share cumulative learnings. Companies’ reaction to the pandemic and their future occupancy plans are extremely varied.

Some have concluded that a larger portion of their workforce (more than previously thought) can work remotely. Some have experienced financial hardship as a result of the pandemic. These companies are putting portions of their leased portfolios on the sublease market in hopes of minimizing run-rates and capturing savings. Similarly, there are companies selling their owned facilities and leasing them back to generate cash and ensure financial health through a potential, extended downturn.

Alternatively, there are those considering expanding their footprint to accommodate social distancing. Preserving company culture or maintaining a large population of mission-critical functions are key drivers behind these considerations.

Importantly, however, most are taking a cautious approach by developing a well-thought-out plan to return employees safely and efficiently in an appropriately staged manner. These plans generally incorporate multiple “on-ramps” and “off-ramps” that provide agility to respond to whatever the future brings.

Nobody can reliably state how the Phoenix office market will ultimately fare in the wake of the Coronavirus. A larger body of action taken by the occupiers must occur before any conclusive trend can be established. Every company has a unique culture and will employ unique solutions – “one size fits one.”