Across the country, office was among the hardest hit sectors during the pandemic, and Phoenix was no exception. Office leasing activity in the market fell by 58% in 2020, according to research from Savills. The vacancy rate fell by increase 110 basis points to 22.3% and the sublease market grew to 2.8 million square feet.
This activity was divergent to activity in other sectors. Phoenix has largely been hailed as resilient through the pandemic with strong activity in both multifamily and industrial, the latter seeing significant growth last year. "Office sector performance has lagged industrial because most major companies are still in work-from-home mode," Tiffany Winne of Savills, tells GlobeSt.com. "While hints of optimism have emerged as the population begins to receive vaccinations, demand is expected to remain tempered until workers are able to return to the office in larger numbers this summer or fall. Vaccinations that are successful, safe and widespread need to be in place before senior executives feel fully confident about bringing their workforces back to the office."
In the second half of the year, office activity did pick up with 725,000 square feet of leasing deals in quarter three and 780,000 square feet of leasing activity in quarter four. However, the gains were not enough to offset the decrease in demand. At the end of the year, office absorption totaled -759,000 square feet, and tech companies were at the center of the losses. "This was a cross-industry phenomenon, but we've seen a particularly heavy contribution from the tech industry. High-profile tech companies like Opendoor, Limelight, Ziprecruiter, and Oracle are all offering space for sublease. Given how technology proficient the typical tech company worker is, we are seeing many employers in this sector say that work-from-home will figure prominently in their post-COVID plans," says Winne.
In addition, the growing sublease market also help to hinder demand. The supply increased more than 91% since the start of the pandemic. "That's a major shift in the playing field for commercial office landlords who now more head-on competition from plug-and-play space options chasing a dwindling pool of office tenants," says Winne. "But subleasing itself remains a challenge given lax tenant demand. The average sublease today has sat on the market for 8.9 months without leasing, and we will likely see that number continue to climb before some of these spaces are filled."
To combat the decrease leasing velocity, landlords are offering generous concession packages. "For office tenants, this finally represents breathing room after more than a decade of rising rental rates," says Winne. "For those companies confident in the long-term viability of their businesses, this can be an excellent "buy low" window of opportunity."
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