Valley Office Vacancy Climbs to 20.4%

But that was the fourth quarter wrap-up, says C&W's Mike Beall. It's starting to perk up in metro Phoenix, with most of the action coming from expanding local companies and lease expirations rather than out-of-state trade. Whatever the driving force, it's a definite welcome sign for submarkets totally unaccustomed to dealing with the negative. Beall says the metro area posted a positive reading even in the late 1980s when it watched its 14 savings and loan headquarters crash and burn.

Beall tells GlobeSt.com that he's fairly confident negative absorption won't be a part of the 2002 scenario. It will be, however, a challenging year due to pricing pressures that will prevail into midyear 2003.

Beall tells GlobeSt.com that he's fairly confident negative absorption won't be a part of the 2002 scenario. It will be, however, a challenging year due to pricing pressures that will prevail into midyear 2003.

Two million sf delivered just in the fourth quarter while sublease space spiked to 1.8 million sf or 3% of the 60 million-sf office inventory. Therein lies cause for the high vacancy, says Beall. "Clearly this was an unexpectedly slow year," he says. "The slow leasing combined with the new inventory resulted in the dramatic uptick." The freshly delivered projects merely were completions of plans set in motion in early 2001. At the year's close, new construction tapered to one million sf. Should leasing continue at the 2001 pace, which he doesn't think is likely, it would take three to four years to fill the space.

The suburbs carried the lion's share of the more than 3.2 million sf of new construction. Deer Valley building brought 832,971 sf to market; Scottsdale Airpark, 751,547 sf; and Tempe, 536,137 sf. Consequently, the suburban direct vacancy jumped to 18.7% and overall, 21.6%. Beall says the glut could take 12 months to 18 months to fill.

At the 2001 close, the metro's direct vacancy stood at 17.9% in comparison to 11.9% at the end of 2000. Overall vacancy jumped 7.3% from 2000's 13.1%. Much of the blame rests with corporate consolidations by Motorola, Bank One, Integrated Information Systems and American Express. In the 7.6 million-sf Camelback Corridor, exits by American Express, New York Life and Hologix alone accounted for about 300,000 sf of the submarket's 636,963-sf negative absorption, according to Beall. Overall, the suburbs posted a negative 33,369 sf, regardless of Scottsdale Airpark's hardy 319,261-sf positive reading.

It's a tenants' market no doubt. Free rent of as much as a year, TIs of $30 per sf to $35 per sf, free parking and higher brokers' commissions are everyday offers from building owners. "The statistics show only a slight decrease of 3% to 5% in the asking rental rates. However, the effective rate (after free rent concessions) can be 15 to 20% lower than asking," says Beall.

The CBD remained relatively stable in 2001 in comparison to the suburbs. CBD direct vacancy was 15.6% and overall, 17.4%. Positive net absorption was 276,464 sf. The 450,000-sf Phelps Dodge Tower and 511,000-sf Colliers Center account for 97% of the class A vacancy in the CBD. Phelps Dodge Tower has 127,000 sf empty and Colliers Center, 180,000 sf. The CBD's gain was Midtown's loss, with the submarket ringing up 270,415 sf of negative absorption to drive rental rates to an average $18.58 per sf.