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Economic Uncertainty Contributes to Phoenix’s Office Vacancy Rate

The Phoenix metro office market continues to show signs of growth and recovery despite a high level of economic uncertainty that businesses around the country are experiencing today. Besides this being an election year, there is uncertainty over healthcare costs, the regulatory environment, minimum wage, taxes, government spending, entitlement programs, political gridlock, and on and on.

The Phoenix metro area has absorbed 1.1 million square feet of office space year-to-date, bringing overall vacancy down to 18.6 percent, according to Colliers. Most of the larger, contiguous office spaces that are in demand by larger companies have been absorbed. However, uncertainty has caused postponement in investment, hiring, expansion and relocation, especially for small- to medium-sized businesses. Much of the vacant office space is composed of small, noncontiguous spaces that these firms would occupy.

Certain submarkets enjoy vacancy rates in the single digits. Chandler’s Price Corridor and downtown Tempe have been consistently attractive to larger office users given their amenities and concentration of technology firms, financial institutions, software developers, insurance, and many other industries and institutions. Rental rates are beginning to inch up in these submarkets as supply is absorbed and new construction begins to take shape.

Excessive economic uncertainty has kept the supply of speculative office space in check even in the best submarkets. The market currently wants larger spaces in well-located buildings. A small- to medium-sized business looking for 5,000 square feet to 10,000 square feet can easily tour more than 25 buildings. However, a larger company looking for 50,000 square feet to 80,000 square feet will only have the option of about two or three buildings, most of which are not in the best locations or conditions.

The result of this imbalance in supply is that small tenants can still drive a hard bargain with landlords. The landlord’s negotiating position for larger space requirements continues to improve, though some free rent is still expected. A landlord’s negotiating posture is especially strong if the building is well located with generous parking and if it has the flexibility to accommodate the most in-demand tenant improvement requests. These requests include higher ceilings, lots of natural light, sustainable building components and larger floor plates.

It’s anyone’s guess how long it will be until there is a more predictable business environment. The majority of the jobs in Phoenix – and in the country – are created by small- and medium-sized businesses. Entrepreneurs and business owners need to perceive greater economic stability before they will innovate, grow and invest. Once that occurs, there should be a significant decline in office vacancy. Until then, the only thing we can be certain of is economic uncertainty.

By Mark Singerman, Vice President, Regional Director – Arizona at Rockefeller Group Development Corporation in Chandler. This story originally appeared in the August 2014 issue of Western Real Estate Business magazine.

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