Developers Begin Gambling on Recovery

Putting this phenomenon into perspective, Jerry Jacobs, senior director with the Phoenix office of Cushman & Wakefield of Arizona Inc. says, "Despite high vacancy figures, developers are preparing for recovery by starting projects they anticipate will be completed at the ideal time for healthy lease-up. This is a calculated risk that could prove very wise, or disastrous."

The 820,500 sf is up from 258,000sf in new construction starts charted last quarter. This new construction is mostly concentrated in the suburbs. "Many developers believe that 2003 will bring recovery to the office market," says Jacobs. "If construction requires nine to 12 months, they want their new buildings to come online in time to take advantage of the surge in demand."

In addition to new construction starts, Cushman & Wakefield also reports nearly two million sf in proposed new office space. All of this is set against a background of a nearly 23% vacancy rate Valley-wide at the end of June, up from 1.2% at the end of March. The CBD's vacancy is up to 19.5% from 18.3% at the first quarter and the suburbs checked in at 23.9% up from 22.7% three months ago.

Jacobs says sublease space "continues to plague the market." He puts the percentage of Phoenix's office space in their category at 3.1%.

"Sublease space has had an effect on the marketability of landlord-controlled space, including rates," he says. "Sublease inventory has clearly influenced the overall vacancy figures."

All things considered, the move towards new construction starts in a depressed market may be an anomaly that only the second quarter can boast, adds another source at Cushman & Wakefield tells GlobeSt.com.