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PHOENIX-There’s light at the end of the tunnel, if third-quarter office statistics by Cushman & Wakefield of Arizona Inc. are an indicator of days to come. Researchers report net absorption increased for the first time this year and overall vacancy dipped slightly. Steady leasing and checked construction will keep the office market rolling as the calendar flips to 2002.

Tim Whittemore, C&W’s senior director in Phoenix, says he’s optimistic that the current leasing pace will continue through year’s end. “Leasing activity certainly picked up during third quarter and we have anticipated continued acceleration,” he says. It might not be a lot since some plans are on hold due to the Sept. 11 attacks, but it should be enough to keep the region on the positive side of the spectrum. “We are likely not to see a significant increase in the absorption pace until next year,” he says in the Q3 report.

Year-to-date net absorption is 117,247 sf. But, C&W is predicting the year will end with overall net absorption of between 500,000 sf and one million sf. In 2000, the office market absorbed 3.3 million sf.

“Leasing activity was spread fairly evenly throughout the Valley with small and medium-size tenants providing the absorption surge,” says Whittemore. He adds suburban markets are driving the upward swing and particularly their class A properties.

In the Q3 analysis, the suburban markets showed 256,539 sf of net absorption whereas the CBD had a negative 139,292 sf. It was a first this year for the suburbs. Scottsdale Airpark, Tempe and Deer Valley led the submarket pack for positive readings. Negative absorption was posted in Squaw Peak, with 187,754 sf pushing vacancy from 18% to 23.9% while the CBD’s Midtown came in at a negative 101,863 sf to drive vacancy to 17.2% from 16.3% at midyear. Class A properties logged a positive 656,617 sf of net absorption while class B and C registered a negative on the Q3 barometer.

Overall vacancy was 13.1% at the start of the year, ran amok to 17.6% at midyear and came in at 16.8% at the Q3 close. In the suburbs, overall vacancy dropped 1.4% since midyear for a Q3 total of 17.1%. All but three suburban markets experienced vacancy declines. The Deer Valley Corridor posted the biggest drop, 3.6%, but still registering a whopping 26.9%. The CBD’s overall vacancy is now 16.1%, up from 15.6% at midyear and primarily due to that Midtown spike.

Of the available space on the market, 2.6% falls into the sublease category. In Scottsdale, the market has 5.7% of its inventory open for sublease; Central Scottsdale, 3.9%; and the Ranches, 3.8%.

Direct rental rates, on the average, dropped 52 cents per sf for a current $20.40 per sf. Stiff competition via incentives for early occupancy and higher TIs will prevail until vacancy goes below 14%, Whittemore says. But, that could take some time since 2.5 million sf is to deliver in the fourth quarter and conceivably could boost the number to 18% or higher. A slowdown in new product and a third-quarter leasing surge pushed the positive and “provided us with a ‘vacancy honeymoon’ of sorts,” he explains. Year-to-date, about 1.62 million sf has come to market, with just 85,600 sf delivering in the third quarter.

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