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PHOENIX-The economic impact of the war in Iraq made tenants wary of relocating, causing leasing activity in the Valley’s office sector to remain slow during the first quarter, a leasing study by Cushman & Wakefield of Arizona shows. But despite a sluggishness in the leasing market, office properties saw a net absorption of 334,227 sf, a sign that leasing activity may be on the upswing.

“Based on the first quarter results of our study, it’s the first time in a long time that we’ve seen a positive turn in the office market,” Larry Downey, senior director with Cushman & Wakefield of Arizona Inc., tells GlobeSt.com. “Are they (the numbers) overwhelming like we saw in ’88 and ’89? No, but they’re not bad.”

The city’s CBD, however, continues to suffer from negative net absorption, losing 160,874 sf of once-occupied space during the first quarter of the year. Suburban submarkets picked up that slack, posting a net absorption of 495,101 sf during that same time frame, with the Camelback Corridor absorbing 220,221 sf and Deer Valley taking in 112,137 sf.

The CBD’s suffering was due primarily to the loss of several government agencies, which vacated midtown to fill recently completed government buildings in downtown, just a few miles away. But the drop in the CBD’s numbers turned out to be a boon for some renters.”That’s where the real cost-conscious tenants are looking,” said Downey, noting that reduced rental rates and building owner concessions in that submarket could fuel a turnaround.

“It’s a dogfight for a lot of landlords,” Downey said of the competition for tenants. “And it’s a good time to be a tenant.”

Still, vacancy rates remained worrisome throughout most of the Valley, where the first quarter had 19.6% of its available direct space empty. Overall vacancy, which includes sublease space, dropped 0.2 percent as a result of sublease absorption, however. “This is an excellent sign for the market,” Downey said. “True recovery will be led by solid sublease absorption. We’re optimistic that recent decreases in sublease availability are the slow beginnings of future recovery.”

While sublease absorption came as good news to the office market, the lack of significant construction activity was even more of a blessing. Only three buildings were completed during the first quarter, adding 145,000 sf to the Valley’s inventory. All are vacant. And only three other office projects, all in suburban markets, are on-line.

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