Phoenix Metro Office Market: A Tale of Resilience Amidst Changing Times

The commercial office space market in the Phoenix metro area has been experiencing a period of remarkable growth and demand, defying national trends. Despite post-Covid challenges, the region’s Class A direct asking rates have continued to rise, reaching an impressive $29.05 per square foot (psf) average. This increase reflects the determination of prospective occupiers, who eagerly compete for high-end office spaces with upgraded amenities to entice employees back to the workplace. Moreover, landlords are offering generous concessions at lease commencement, such as lease flexibility, free rent periods, and higher tenant improvement packages, adding to the allure of the Phoenix office market.

Aaron Dutcher, from MHG Commercial, observes a notable trend not only in the Class A office space but particularly in the demand and availability of office spaces in the suburban Phoenix submarkets. Those markets are thriving, and vacancies continue to be absorbed. The Phoenix office market, overall, is adapting and envisioning its future with rising rents and more people working closer to home. This strong demand for office space in Phoenix surpasses trends seen in other major cities. The direct vacancy rate, while slightly above the 10-year average at 17.9%, underscores the enduring demand for office spaces. However, sublease vacancy has reached a record high of 5.7%, indicating a cautious approach by businesses in leasing out excess office space amidst evolving work patterns. Lending to more and more of the smaller footprint suburban submarket office space to be absorbed and remain in high demand. The Phoenix metro area’s commercial office space market continues to thrive, especially in these suburban submarkets. The robust economic growth in the region attracts businesses and corporations seeking to establish a presence throughout the valley with multiple locations with smaller footprints that also allow their employees to work closer to home and schools.

Although the Valley has witnessed an upward trend in office vacancy rates, reaching a 10-year high during Q2. The primary driver of this increase is the surge in sublease spaces across the Phoenix metro area. Yet, the direct vacancy rate remains relatively stable, underscoring the robust demand for office spaces in the region. However, sublease vacancy has spiked, indicating some businesses’ preference to lease out their excess office spaces, responding to evolving work dynamics. The key to remember here is that the tenants of these sublease office spaces are still paying rent.

Despite national reports projecting the demise of offices due to remote work trends, the Phoenix metro area stands as an exception. Businesses and employees here value the collaboration, company culture, and work-life balance provided by physical offices. The region’s robust demand for commercial office spaces in the business districts outside of downtown and without large footprints and high demand for suburban submarkets fuels optimism and growth in the local real estate industry.

In conclusion, the Phoenix metro area’s commercial office space market continues to thrive, exhibiting resilience amidst changing times. The surge in Class A direct asking rates and demand for high-end office spaces with upgraded amenities showcase the region’s appeal. The scarcity of suburban office spaces further demonstrates the market’s robustness as businesses seek accessible and amenity-rich locations. Despite challenges like increased sublease vacancies and fluctuations in property sales volume, the Phoenix metro area remains a vibrant and prosperous hub for commercial office spaces, defying national doom and gloom narratives. The outlook for the Phoenix metro commercial office space market remains promising, offering continued growth and opportunities for investors, businesses, and the local community.

Mark Hutchins & Jereme Kleven
Owners
My Home Group
8360 E. Raintree Drive, Suite 120
Scottsdale, AZ 85260
myhomegroup.com