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Net Absorption

PHOENIX-The area’s 71.5-million-sf office market is suffering a serious downturn due to a deteriorating economy, according to third quarter reports from Delta Associates and CB Richard Ellis. Greater Phoenix has lost 32,500 jobs in the last year, with the 1.7% drop considered the weakest performance since 1975.

As a result of the economic decline, vacancy rates continue to climb. Both reports say vacancies stand at about 17% in comparison to about 13% one year ago. According to Delta author David Parham, net absorption improved to 394,000 sf after registering negative 28,000 sf in the second quarter and available sublease space grew by 55,000 sf after decreasing by 135,000 sf in Q2. Available sublease space now represents 1.3% of the standing inventory. Although Delta does not give a sublease total, CBRE puts it at 1.9 million sf, up by 800,000 sf in the past year.

Rents have declined along with occupancy levels. Delta pegs the current average class A rent at $27.37 per sf on an annual basis while CBRE calculates it at $25.44 per sf. In both cases, the figures represent a decline of about 2.5% since January, based on an annualized rate of 2.5%. The latter projects absorption for the year will be at its lowest level since 2002.

According to Delta, there is 5.8 million sf of office space under construction or being renovated in the Valley, down from 6.8 million sf at midyear and 6.9 million sf a year ago. Only 14% is preleased versus 25% at midyear and 40% a year ago. Some 5.8 million sf of new and renovated space has been delivered since January, with 33% leased upon delivery. This figure compares to 3.8 million sf delivered in the first three quarters of 2007 when 41% was committed by delivery.

CBRE researchers say the continued delivery of new space will “further cement the market as a tenants’ market until there is an improvement in the economy.” But they add that a report from Economy.com predicts metropolitan Phoenix will emerge from its current struggles better positioned to sustain long-term growth due to a relatively low cost of living and doing business coupled with continued population growth and business relocations from more expensive regions.

By Delta’s calculation, office investment sales totaled $1.2 billion in the first three quarters. For the same period last year, the sales volume was $2.5 billion. On the other hand, prices have been climbing, averaging $229 per sf compared to $202 per sf for the first nine months. But Parham says he expects the average price to level off due to the ongoing credit crisis.

Looking forward, CBRE reports the University of Arizona forecasts the state’s economy will not rebound for another two years. However, it points out that despite the job losses of the past 12 months, the Phoenix unemployment rate of 5.1% is below the state and national rates of 5.6% and 6.1%, respectively, providing the market a more solid underpinning than most other major metro areas. Nonetheless, Parham says the weak job market and active construction pipeline most likely will continue to dampen rental growth in most submarkets for the remainder of the year and into the next.

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