Phoenix Office Market Pushing 15% Vacancy

Phil Breidenbach, senior vice president in Colliers International's Phoenix office, says the numbers aren't a shock. The real estate community, he says, was braced for this since summer 2007. "That's when we started to see things slip," he says. "We remained optimistic until the end of the year, but as things started coming out in the press and statistics, it just substantiated the knowledge that activity has slowed dramatically."

In Colliers' Q1 office report, researcher calculated that vacancy was 14.9% or 3.3% higher than the same period last year. Inventory is 120 million sf. The quarter ended with 229,173 sf of absorption. Deliveries totaled 2.6 million sf and there is an additional 6.2 million sf under way.

CB Richard Ellis' first-quarter report also showed a 14.9% vacancy. Its researchers pegged the increase at 3% since Q1 2007. CBRE's researchers are tracking a 69.8-million-sf inventory, with net absorption positive at 50,844 sf. Its researchers tracked 881,836 sf of deliveries in the first quarter, with an additional 4.6 million sf under construction.

"None of this was a surprise," says Jerry Noble, a CBRE first vice president in Phoenix. "We knew that we'd oversupplied demand since Q3 2007." With so many consecutive quarters of declining absorption, he tells GlobeSt.com that "people were expecting the first quarter of '08 to be flat, not only in terms of activity, but in deals being signed."

Noble and Breidenbach agree that what would normally have been a moderate downturn was exacerbated by the subprime fallout. Both brokers point out Phoenix was home to many housing industry businesses in construction and mortgage banking. "Every sector-related industry to housing has slowed or stopped or downsized--and for the less fortunate, gone out of business," Noble says.

As a result, Breidenbach says the office market favors the tenants. It's currently driven by concessions while tenants take their time to find the right opportunities and deals. Building owners are feeling a sense of urgency while trying to adjust yield and lease expectations.

Noble says tenants with credit have the leverage, with some jumping into the market for fairly substantial deals. But CBRE's numbers show 4.6 million sf of office space will come on line in 2008. "We're not going to absorb 4.6 million sf," he says.

The local experts say the scenario isn't too likely to change for the remainder of the year or even into next year. Breidenbach, in fact, says it could be early 2010 before a recovery is felt.

"We're going to see vacancies staying where they are or going up a little this year," Breidenbach says, adding he believes the presidential election might help spark a recovery. "People will see that as an emotional changing of the tide as well as being well-timed with people getting back into job-growth mode and more bodies coming into Phoenix."

Noble is somewhat more drastic with his predictions, believing vacancies could top out at 17% or 18% before the worst is over. "I'm hoping to see stabilization in the office market prior to the election," Noble says. "I would like to see positive absorption numbers posted based on the current demand. That's more important for Phoenix than what might happen with the election."