— Dave Carder, Senior Vice President, Kidder Mathews —
The state of Phoenix’s office market is not easily summed up with a catchy headline or a few brief bullet points. Along with most large metropolitan areas across the country, Phoenix has struggled with lower demand, rising vacancies and a shift toward hybrid workweeks. However, several emerging trends are creating positive shifts in the market that should be noted as we look to 2025 and beyond.
The average vacancy rate of the Phoenix office market over the past decade was 18.5 percent. That includes a low of 13.9 percent in 2019 and a high of 24.8 percent in 2024. Gross leasing absorption averaged nearly 7 million square feet annually, with a high of nearly 7.9 million square feet in 2019 and a low of 5.5 million square feet last year.
Net leasing absorption showed a similar pattern, peaking at 3.1 million square feet in 2019 and declining to negative 2.2 million square feet in 2024. These trends point to 2019 being the market’s best-performing pre-pandemic year across all three metrics.
Despite 2024’s gross leasing absorption (5.5 million square feet) being close to the 10-year average, the significant rise in vacancy and dramatic drop in net absorption are largely due to companies downsizing their office footprints. That, or relinquishing spaces upon lease expiration in response to the post-pandemic work-from-home phenomenon.
One such example is GoDaddy, which moved from a 150,000-square-foot suburban building in the ASU Research Park to a 31,000-square-foot space at 100 Mill in downtown Tempe. The hybrid workweek schedule — requiring employees in the office two to three days a week – has led many companies to downsize, leveraging modern office environments with superior amenities to attract employees back.
Another trend is tenants “going dark,” where they continue paying rent but vacate spaces while employees work remotely. Examples include Santander Bank, which terminated its 117,000-square-foot lease in Mesa early, and Verizon, whose empty 170,000-square-foot Chandler building was sold for industrial conversion.
In 2024, office vacancy peaked at 24.8 percent, with an average lease size of around 4,244 square feet. This trend has favored owners of smaller office buildings (50,000 square feet or less), which can offer smaller suites to meet demand. As a result, these properties have a lower vacancy rate of 12.2 percent, outperforming larger competitors.
Despite record-high vacancies, rental rates have remained strong. The 10-year average lease rate was $30.56 per square foot, peaking at $30.86 in 2024. This is due to high tenant improvement costs and rising operating expenses, which landlords are passing onto tenants.
New construction has slowed significantly due to rising costs and financing challenges. The 10-year average was 1.8 million square feet under construction, peaking at 3.5 million square feet in 2018. However, there is currently only 415,000 square feet underway.
Looking to 2025, demand for smaller speculative suites in the 1,500- to 7,500-square-foot range will remain strong. Meanwhile, larger spaces will face ongoing challenges. The market’s overall recovery depends on companies enforcing return-to-office policies. However, submarkets like North Tempe, Camelback Corridor and Scottsdale are expected to see continued demand. A key concern moving forward is the upcoming maturity of CMBS debt, which could result in an increase of distressed sales over the next 12 to 24 months.
— By Dave Carder, Senior Vice President, Kidder Mathews. This article was originally published in the January 2025 issue of Western Real Estate Business.