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PHOENIX-During the third quarter, the metropolitan Phoenix office market saw a slight improvement, with increased net absorption and a slight decline in the overall vacancy rate, according to the latest statistics from Cushman & Wakefield of Arizona Inc. It marks the Valley’s first positive for this year, with year-to-date net absorption at 117,000 sf, says the Phoenix team.

Overall vacancy dropped from 17.6% to 16.8% during the quarter. At the onset of 2001, vacancy was riding at 13.1%.

“We’re pleased with this rally and are optimistic that this level of leasing will continue through yearend,” says Tim Whittemore, New York City-based C&W’s senior director in Arizona. “The pace of leasing activity certainly picked up during third quarter and we have anticipated continued acceleration. However, the terrorist attacks of Sept. 11 resulted in some companies putting lease plans on hold. So we are likely not to see a significant increase in the absorption pace until next year.”

The office market’s slight improvement in the third quarter is only a brief reprieve, Whittemore says, expect an increase in the vacancy rate in the fourth quarter. “The third quarter decline in overall vacancy occurred because we had a surge in leasing while a relatively small amount of new product came on line,” he explains. “This provided us with a ‘vacancy honeymoon’ of sorts. Anticipated construction completions for fourth quarter will drive the vacancy figures back up.”

Nearly 1.62 million sf delivered so far this year, of which only 85,600 sf came due in the third reporting period. Whittemore predicts that 2.5 million sf will be added in Q4. “This influx of new inventory will increase our overall vacancy percentages to 18% or more,” he says.

This year’s overall net absorption is predicted to range between 500,000 sf and one million sf, which is sticker shock in comparison to 2000′s 3.3 million sf of net absorption. “Based on the cyclical time lines, 2002 should bring more recovery with steady leasing and very little construction,” says Whittemore.

During third quarter, suburban markets posted 256,000 sf of net absorption, counterbalancing the 139,000 sf of negative net absorption experienced in the CBD. This was the first time this year that the suburban markets, as a whole, have posted positive net absorption.

“Leasing activity was spread fairly evenly throughout the Valley with small and medium-sized tenants providing the absorption surge,” says Whittemore. “The suburban markets rose to drive the commercial real estate economy last quarter and class A properties dominate within those areas.”

All but three of the suburban areas had positive net absorption, with Scottsdale Airpark, Tempe and Deer Valley leading the field. Those submarkets posting the most negative year-to-date absorption numbers were Squaw Peak with a minus 187,754 sf and Midtown at a negative 101,863 sf. Midtown will lose even more ground in the fourth quarter when copper giant Phelps Dodge exits a high-rise near Central Avenue and Thomas for its new Downtown headquarters.

Class A projects have experienced the majority of positive net absorption activity during the year, recording 656,000 sf at the end of third quarter. Classes B and C have posted negative net absorption this year as well.

Sublease space continues to be a major factor in the office market, with 2.6% of available office space falling in the sublease category. Scottsdale appears to contain the highest percentage of sublease space. Scottsdale Airpark posted 5.7% of sublease space; Central Scottsdale, 3.9%; and The Ranches, 3.8%.

Overall vacancy rates decreased in the suburban submarkets, but increased slightly in the CBD. The CBD’s vacancy rose to 16.1%, up from 15.6% at midyear. Midtown led the CBD increase, going from 16.3% to 17.2%. All but three suburban areas saw decreases in overall vacancy. Deer Valley Corridor dropped significantly from 30.5% to 26.9%. However, Squaw Peak’s rose from 18% to 23.9%. On average, suburban overall vacancies dropped this past quarter from 18.5% to 17.1%.

Direct average rental rates dipped slightly in the past three months, coming in at $20.40 per sf instead of $20.92 per sf. “Landlords are now competing to fill buildings, frequently offering tenants early occupancy and expanded tenant improvement allowances,” Whittemore says. “We expect this to continue until vacancy figures again fall below the 14% range.

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