Phoenix’s Office Market Slows

As high inflation and rising interest rates have begun to influence the real estate market in increasingly impactful ways, Phoenix’s office market has shown a constant slowdown since the beginning of 2023, CommercialEdge data shows.

Despite the 2.0 percent growth in office-using jobs on a year-over-year basis as of February, the metro closed the year’s first quarter with smaller figures for developments, sales and leases. We’ve undergone a rundown of the relevant figures characterizing The Valley’s office market evolution through the first three months of 2023.

A smaller pipeline for The Valley’s office market

Some 860,000 square feet of office space were under construction in Greater Phoenix as of March, representing 0.6 percent of total stock. The rate was significantly smaller than the one recorded nationally, where office developments accounted for 2.1 percent of stock, and was surpassed by all the metro’s peer markets: Charlotte (3.8 percent), Dallas-Fort Worth (2 percent) and Atlanta (1.9 percent).

In addition, only 77,600 square feet, or 9 percent of the total, have entered the metro’s pipeline since the beginning of the year. The situation is on par with the one recorded in the same period of 2022, when developers had broken ground on 77,000 square feet.

Some of The Valley’s more significant developments included:

• Aligned Data Centers’ office campus expansion in Chandler. In May 2022, the firm acquired two parcels totaling some 19 acres within the 186-acre Continuum business park; by the end of the year, Southwest Value Partners started construction on two office buildings totaling 300,000 square feet. Completion is expected in the third and fourth quarter of 2023.
• A new office building within the Cavasson mixed-use development in Scottsdale. Nationwide Realty Investors broke ground on the 150,000-square-foot project in 2022, with delivery slated for October. The property already houses two office buildings totaling 590,000 square feet. At full build-out, Cavasson will encompass roughly 1.8 million square feet of office space, 1,600 residences and a hotel, as well as multiple retail, restaurant and amenity spaces.
• The first building at the Rio Yards office campus in Tempe. Developed by Wentworth Property Co., the 148,356-square-foot project is coming online at 1337 E. Rio Salado Parkway as one of the complex’s three office components to total 450,000 square feet when complete.

Leasing activity slowed down throughout the quarter

The Valley’s office leasing activity slowed by the end of 2023’s first quarter. After clocking in at 17.0 percent in January and at 17.1 percent in February, the metro’s vacancy rate rose 110 basis points in March, reaching 18.2 percent. The value was also 150 basis points higher than the national vacancy rate of 16.7 percent, up 20 basis points over the month.

Among similar secondary markets, The Valley ranked second after Charlotte (11.4 percent vacancy rate as of March) while outperforming Atlanta (19.8 percent) and Austin (22.2 percent).

In one of the quarter’s largest leasing deals, the U.S. General Services Administration decided to remain at their current location in Phoenix’s CBD. The governmental agency occupies 62,721 square feet at Two Renaissance Square, a 488,616-square-foot building owned by Cypress Office Properties. The previous lease was set to expire in November.

Modest moves for the coworking subsector

Coworking, a rising subsector of the office market, has also shown signs of slowdown since the beginning of the year. Greater Phoenix had nearly 1.3 million square feet of shared office space inventory as of March, representing 1.5 percent of its total rentable office space. The metro’s inventory equaled Dallas-Fort Worth’s (1.5 percent of rentable office space) and topped Charlotte’s (1.2 percent) but was surpassed by Atlanta (2.0 percent).

The Valley’s largest coworking operator, Regus, had more than 412,000 square feet of shared office space in Greater Phoenix as of March. Other operators include WeWork (with 283,500 square feet in its inventory), Expansive (with 223,900 square feet) and Industrious, which recently announced a new Phoenix location.

Fewer transactions, lower values

More than 780,800 square feet have sold across the metro since January 2023, for a combined $164.2 million. The amount of traded square footage was more than four times smaller year-over-year: In the first quarter of 2022, some 3.5 million square feet changed hands for $999.3 million. In March, the median sale price per square foot was $210, above the national average of $195 but down 31.1 percent year-over-year.

The quarter’s priciest deal involved a 68,000-square-foot medical office building in Peoria. Montecito Medical purchased Banner Health Center for $29 million from Banner Health. This was the first time the Class B property changed hands since its completion, in 1989.

In another significant transaction, Mass Equities sold Chandler Corporate Center I and II, two mid-rise office buildings totaling 136,728 square feet in Chandler. Zeitlin Capital paid $22 million for the Class A assets, financing the purchase with a $14 million loan from Wells Fargo Bank.