After a strong start to the year, COVID-19 has stamped a pause button on the majority of office deals in the market. Closing out the first quarter, the Metro Phoenix office market absorbed just 310,280 square feet. This is 25% of Q1 2019’s figure. Vacancy crept up only slightly by 100 basis points to 16.2%. Full-service rents actually increased slightly to $25.74/SF/YR from $25.18/SF/YR.
Where do we go from here? We don’t know exactly — nobody does. These are uncharted waters. There are many variables to consider with a readily available vaccine leading the list. Here are two cases to consider:
The Case for a Substantial Office Correction: Growing unemployment will send shock waves through the economy that cause most businesses to downsize, and many to fail. Sublease space (lots of cool, new furnished space) could flood the market, increasing supply while demand continues to fall. Loans that cannot be modified will force buildings to go back to the bank and trade for severe price reductions.
The Case For a Continued Stabilized Office Market: Because market fundamentals were so strong prior to COVID-19, supply may continue to decrease at a reasonable pace. Consider that there is 2.5 million SF of office product under construction. 51% of that figure is already leased, leaving just 1.26 million SF of new product to lease. As Q1’s stunted trends continue through the year, net absorption will reach 1.2 million SF for all of 2020; leaving vacancy hovering around 16%. (Speculative office development is on hold during this period of uncertainty.) Furthermore, companies focused on increased density will relax that figure to promote safe distances at work, and actually expand — especially in Arizona where the sun shines and there is plenty of space to enjoy it.
Time will provide the answers as the office sector is always a lagging indicator. Call me anytime for real-time updates. My assignments take my team all over the region and we’re fortunate to keep a tight pulse on the market.
Click on the link below for our Lee & Associates Arizona 1st Quarter 2020 Office and Under Construction Report.