The Greater Phoenix office market posted positive net absorption of 62,244 square feet during second quarter, which was largely made possible by fewer large move-outs in the evolving office environment. A report released by Colliers in Arizona indicates sublease space continues to pile into the market, increasing 19.7 percent during the past year.
Second quarter posted positive net absorption, following two previous quarters of negative figures. The year-to-date absorption remains negative at -392,872 square feet. New direct leases with landlords dominated the market during second quarter, versus the strong sublease activity experienced during the previous quarter. Four of the top five leases during second quarter were direct with landlords. The largest was originally on the sublease market, but Republic Services bought out it lease and Vanguard committed with landlord CIM Group to take a 10-year leae for the space at Northsight Corporate Center. Scottsdale Airpark and Camelback Corridor led the market with new direct deals involving more than 20,000 square feet. Each submarket grossed more than 100,000 square feet of direct leasing during the quarter. The two largest subleases to hit the market during the past three months came from Carvana. These sublease opportunities added 292,119 square feet at Marina Heights in Tempe and 267,962 square feet at Riverpoint Parkway.
Direct vacancy increased 10 basis points during second quarter, reaching 14.1 percent. Total available space increased 130 basis points year-over-year, marking the highest available rate since second quarter 2014. The market had a slowdown of sublease space hitting the market during first quarter, but the figure upticked in second quarter to a new market high. There are currently 7.4 million square feet of sublease space in Greater Phoenix. Six submarkets contain more than 500,000 square feet of available sublease space. Tempe and Chandler lead the market with 1.5 million and 1.2 million square feet of sublease available, respectively. Class A direct vacancy ticked up to the highest point since third quarter 2013, reaching 19.0 percent.
Contrary to national news reports, the office market in Phoenix has not witnessed a decrease in rental rates. At the end of second quarter, the overall average asking rate was $29.24 per square foot, a 2.1 percent increase year-over-year. Class A asset rents increased 2.8 percent over the same period to finish mid-year at $32.32 per square foot. Only five of the metropoitan area’s 25 submarkets posted a decrease in rental rates year-over-year. These included two Mesa submarkets, Southwest Phoenix, Downtown South and 44th Street Corridor.
Class A assets in Tempe jumped ahead of Camelback Corridor during second quarter to post the highest rental rate increase, posting a 6.8 percent rise year-over-year to $40.12 per square foot. Other top three Class A rental rate increase markets include Camelback Corridor and Scottsdale South, increasing 5.4 percent to $39.48 and 4.2 percent to $38.82 respectively.
Two new buildings were completed during second quarter totaling 125,000 square feet. An 80,000-square-foot build-to-suit project for Banner Health in Central Scottsdale was the largest. Currently there are 990,740 square feet of office space under construction in Greater Phoenix, which makrs an increase from first quarter. The Viasat build-to-suit at Arizona State Research Park was started during second quarter. Phase I of the company’s expansion totals 135,000 square feet and is slated for delivery in June 2024. Tempe and Scottsdale Airpark submarkets lead with the most product under construction, where their 598,000 square feet of projects make up more than 60 percent of total office developments underway. Current construction activity is at approximately 52 percent of the trailing three-year average of 1.8 million square feet. This is expected to decrease next quarter with delivery of Rio Yards in Tempe.
The sales volume of office properties continued to decrease, falling 15.7 percent quarter-over-quarter. Sales for second quarter ended at $187 million, marking a 64 percent decrease compared to the same period a year ago. This was the third consecutive quarter of declining sales volume. Average price per square foot dropped below $200, equating to a 20.4 percent decrease quarter-over-quarter. This was largely attributed to four of the 30 properties sold during second quarter trading below $100 per square foot. Year-to-date average price per square foot is $217.45. Scottsdale South submarket experienced the most sales, making up 23 percent of the volume during second quarter. The single sale of Scottsdale Financial Center, a 109,968-square-foot property trading in June for $44 million established Scottsdale South as a focal point. South Tempe/Ahwatukee submarket was the second strongest in sales volume with three transactions totaling $23.9 million.
The Greater Phoenix office market experienced a glimpse of relief during second quarter with a lower volume of move-outs. However, there are five large leases expected to expire during the remainder of the year totaling more than 800,000 square feet. As tenants push to right size their space, the market will experience additional inventory becoming available. Despite companies decreasing their office footprints, there was a big positive for the market during second quarter. Phoenix City Council authorized a development agreement with Republic Services and City North to develop a new headquarters for the company. Republic Services is working with Crown Realty Group on the 240,000-square-foot headquarters.
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