Phoenix’s Office Sector is Fundamentally Sound

by Jeff Shaw

— By Kyle Seeger, Vice President, JLL —

Like office markets across the U.S., Phoenix continues to navigate its post-pandemic “normal.” But with red-hot population growth, a comparatively low cost of doing business, a dynamic office inventory and a stellar quality of life, it also remains a prime contender for new office locations, relocations and expansions.

Metro Phoenix’s overall office vacancy rate had ticked up slightly to 25.6 percent at the close of 2023. Average annual rent growth had decelerated moderately to 0.8 percent year over year, but remained positive. The overall direct asking rent had stabilized at just over $29 per square foot. Although negative absorption remained markedly high at more than 3.5 million square feet through 2023, there was less quarterly loss in the fourth quarter compared to the third quarter.

Amid all of this, Phoenix’s cost and demographic advantages — along with its ample inventory — pushed leasing momentum forward. In some cases, it even created positive net absorption, such as in prime office corridors and in newer, highly amenitized Class A projects. 

The Grove, a 180,000-square-foot, Class AA office building in the Camelback Corridor, is a prime example of this. Within 16 months of its mid-2021 groundbreaking, the project had already reached full occupancy, setting record rental rates along the way from companies eager to be a part of this top-of-the-line, $400 million mixed-use master plan.

Company Appeal

A 136,194-square-foot lease completed by JLL in December for Peckham, Inc. at One Compass Center was not only the largest office lease of the year, but it underscored Phoenix’s population advantage. The tenant even cited the rich local employment pool as a driving force behind its leasing decision. Secured for an inbound contact center, the lease also reflected the Valley’s continued need for centrally located, plug-and-play Class A/B space to serve large, employee-heavy operations.

Smaller office deals and spec suite leases are also on the rise across the metro market. This indicates a preference for newer, flexible space as some companies continue to right-size in response to hybrid work scenarios while others actively deploy strategies to enter or expand in the Phoenix market.

The pipeline of new local office construction sits at just 635,856 square feet, with 48 percent of that space pre-leased. This comparatively low construction level may change as interest rates fall and financing fundamentals for new construction improves. A shortage of new U.S. office deliveries in 2024 may also impact this balance, bringing development interest back to the Valley for all the reasons previously stated.

Above all of these projections, however, hangs Phoenix’s innate benefits, which keep our long-term office market outlook strong, even as we contend with short-term challenges.

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