Not surprisingly, the Metro Phoenix office market Q2 2020 experienced plenty of highs and lows. Office leasing slowed, but it did not stop. Sublease space increased dramatically, but it’s not at an all-time high. Positive COVID cases declined, then spiked here in Arizona, as they did in much of the country. We continue to learn about COVID-19 as we go along and how it affects the office market. Speculation continues to vary among experts and occupants on how office space will be affected. We have been posting our thoughts here, here, here, and here.
In the meantime, these are the numbers I can report:
–Metro Phoenix net absorption was high enough in Q2 at 600,000 SF to reduce overall vacancy to 15.8%, from 16.2% in Q1. (Gross absorption hit 2.1 million SF in Q2, compared to 2.7 million SF of Q4 2019. For more on gross absorption, contact me).
–YTD, Net absorption is 851,000 SF, which puts the market on track to do 44% of last year’s figure.
–Full service asking rates stayed flat, rising by just $0.04/SF/YR to $25.78/SF/YR.
Work from home (WFH) naturally remains one of the biggest unknowns in Metro Phoenix, as well as the entire country. It’s great that companies were able to transition so quickly to work from home, but it doesn’t necessarily mean this is a sustainable way to work in the future… I was interrupted for 30 minutes in writing this narrative to wipe up a raspberry smoothie that my daughter managed to spray on our ceiling. Next week, Craig has a very interesting narrative on trends for long-term work from home, so be on the lookout for that.
Below is a link to our Lee & Associates Arizona Second Quarter Office Report and as usual, I’ve included my top takeaways:
Sublease Space Increasing– This increased dramatically from 1.36 million SF to 2.0 million SF in 90 days. But, it is still less than the high of 2.5 million SF in 2017.
Rental Rates Holding for Now– These have not declined as much as one might think they should have by now. Landlords understand that they will need to soften on lease rates and concessions, but they have also not yet experienced substantial pain in increased vacancy. Many tenants have expected a more immediate re-pricing due to the pandemic. The result is pro-longed negotiations where there is a disconnect between landlords still very stabilized, and tenants who expect a pre-mature correction in lease rates.
Active Transaction Sizes- The top 5 deals reported in Q2 are a reflection of the activity going on now in Q3; In short, there are not a lot of large deals. Currently, in the market, only a handful of large tenants over 50,000 SF are active. Most large tenants have a wait-and-see attitude. The majority of tenants touring the market are less than 20,000.
Want to talk more about these trends or how I can help you with your office space? Give me a call.