Phoenix Office Market Stays Relatively Steady

"Companies are still consolidating and downsizing and that has affected absorption," Larry Downey, senior director with Cushman & Wakefield, which issued the Valley-wide office study, tells GlobeSt.com. "There still continues to be corporate consolidations, but we're seeing more tenant movement making long-term decisions based on the softness of the market."

Indicative of the market's softness is an increase in overall vacancy rates, which jumped to 21.5% during the second quarter, an increase of 0.3% from three months ago, but a 0.2% drop from just one year earlier. Downey said the uptick in vacancies posed a slight setback for the Valley's office market, but more positive absorption rates are expected for the third and fourth quarters as an increasing number of businesses enter the market in search of new space.

"A year or so ago, companies would be postponing decisions and waiting on the economy, but now they're starting to make moves and decisions about their space," Downey explained. "Even though we've had a hiccup based on the numbers for this quarter, tenants that are in the market now are looking for space so we should be seeing some positive absorption in the third and fourth quarters."

Still, the Valley's second quarter numbers were far from stellar. Year-to-date net absorption in the Valley took a hit, dropping to 149,485 sf from 334,227 sf at the end of first quarter. Phoenix's CBD, which has long suffered from a lack of rentals, saw conditions improve, however, with a positive net absorption of 9,761sf. The hardest hit area was the Camelback Corridor, where year-to-date net absorption dropped to 31,185 sf from 220,211 sf at the end of the first quarter. The loss in absorption was primarily attributed to Charles Schwab vacating approximately 163,000 sf at 24th and Highland streets.

The Valley's suburban market also saw net absorption rates decline from 495,101 sf at the end of the first quarter to the present 300,598 sf. Out of 17 Valley submarkets, the Chandler/Gilbert and Deer Valley Corridor posted the most positive results during the quarter, raising their year-to-date net absorption of 71,879 sf and 199,687 sf, respectively. Nine submarkets experienced a decline.

Vacancy rates also remained steady during the past three months with the CBD maintaining its 19.8% rate throughout the year. That figure, however, reflects a 0.3% gain over the prior year's period. Downtown saw its overall vacancy rate decline from 15.2% at the end of March to its current 14.7% or nearly two percentage points lower than the than 16.5% registered a year ago. Midtown also saw a slight increase in vacancy, which rose from 22.6% at the end of first quarter and 21.4% at this same time last year to the present 22.9%.

The 44th Street Corridor posted the highest vacancies of the quarter with 30.8% followed by the Central Phoenix area with 29.7%. The healthiest office submarket was in the West Valley, which saw an overall vacancy rate of 13.4%.