PHOENIX-Demand has remained steady for office product and absorption ate up some of the vacant space during the third quarter. Experts suggest, however, that overbuilding could become a concern since there is 3.2 million sf to 3.5 million sf of new space scheduled to come on line within six months.

Blake Hastings, vice president with Phoenix-based Grubb & Ellis/BRE Commercial LLC, says it could take about one year to absorb what’s under construction. “I think we’re in a time in which we won’t be seeing a growth of 20% a year like we did in 2005, but growth will be steady as we eat up the excess space,” he tells GlobeSt.com.

Grubb & Ellis’ Q3 report shows a total inventory of 60 million sf, with 8.9 million or 14.9% of vacant space. Its research team has identified 3.2 million sf that’s under construction. The Q3 absorption was 555,719 sf.

CB Richard Ellis’ Q3 report pegs inventory at 66.9 million sf, with 8.6 million sf or 12.9% vacant. Its team concluded that net absorption was 224,406 sf for the quarter. The report notes there is 3.5 million sf under construction.

One major area of focus is the Scottsdale market. Although it’s been a popular market for office activity, Hastings acknowledges that concerns about overbuilding especially apply to that submarket. “There’s a lot of competition out there,” he says. “In one deal we were working in that area, we had about 10 other building owners in competition with us.”

The numbers underscore the concern. The CBRE report puts Scottsdale’s inventory at 15.1 million sf, of which 13.32% or 959,864 sf is empty. The quarterly net absorption was only 185,432, with 1.19 million sf under construction.

Grubb & Ellis’ Scottsdale numbers are slightly different, with 12.8 million sf of inventory and two million sf or 15% vacant. Its researchers put absorption at 550,000 sf. But again, a little less than one million sf is under construction.

Hastings points out that the subprime fallout is beginning to have an impact on the office market although the entire home-building and mortgage industry began slowing down before that fiscal crisis began. However, many subprime lenders with small and large amounts of office space are melting away, leaving vacancies. “You had New Century Financial that came here, took space, then left almost overnight. That’s 30,000 sf of sudden space,” Hastings stresses.

Still, Hastings says he doesn’t see oversupply as a long-term problem. “Some landlords will lose tenants and some will see occupancy decline,” he says. “Once the supply is under control, then we’ll go back to a steady growth, probably by the end of 2008.”

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