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PHOENIX-Fourth quarter figures for Phoenix and Tucson’s office sector show negative absorption and increasing vacancy. But in this tale of two cities that are separated by 80 miles of Interstate 10, the office market scenarios are vastly different.

The “tale,” in this case, involves the amount of product anticipated to come online. According to CB Richard Ellis’ Q4 Phoenix report, a little more than 3 million square feet is under construction. Adding to this is an inventory of 72 million square feet, a negative absorption of 548,334 square feet and a 19.1% vacancy rate, a 5.2% increase from the Q4 2007.

Down the road, the CB Richard Ellis report puts Tucson’s inventory at 8.1 million square feet, vacancy at slightly less than 15% compared to 12.6% from the year before, and a negative absorption of 102,206 square feet. But Tucson only has about 43,000 square feet in the pipeline, all in the northeast submarket.

“With only about 8.2 million square feet of office space, we’re a small market,” CB Richard Ellis first vice president Buzz Isaacson tells GlobeSt.com. “We haven’t built a lot of speculative space. In fact, we haven’t built a big multi-tenant office building in more than 20 years.”

The Tucson-based Isaacson adds that much of the office space developed during the last several years has come online in the form office condos, and little of that built on spec. “We’ve created more than 2.5 million square feet of new supply during the past eight or nine years, but it’s been absorbed, for the most part,” Isaacson says. “Existing-generation space is what has been impacted.”

But Phoenix’s office market represented a perfect storm, but not in a positive way says Jerry Noble with CB Richard Ellis’ Phoenix office. The housing bubble of the mid-2000s brought “every developer to town looking for a piece of dirt to put a shovel in,” says first vice president Noble.

When the housing bubble burst, office space came on line, courtesy of going-out-of-business home builders and auxiliary businesses from title to finance companies. Because about 25% to 35% of local office space demand came from housing-related industries, “we ended up with tons of sublet space, combined with tons of new product, and the worst year in 2008 for office performance,” Noble tells GlobeSt.com.

But Noble is optimistic that 2009 will likely be a turning point. Though there’s no way 3 million square feet of new space will be absorbed in the next 12 months, he points out there has been a lot more activity in the first two weeks in 2009 than there was in the last quarter of 2008.

“Phoenix is becoming reasonably priced again,” he says. “It’s a good place to grow a business or expand. Users will see some great real estate opportunities in the next year or so.”

Isaacson also predicts a ’09 recovery in his market area. Pent-up demand exists, he points out, and once the market has bottomed out and a direction becomes crystal clear, people will be willing to make decisions and forge ahead.

“Tucson is a market of smaller users, and they’ve held off on expanding,” Isaacson adds. “Once they feel like the economy is headed in the right direction, the recovery will be quick.”

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