Back-to-Work Mandates and Overall Economic Growth Trends Help to Boost Local Office Market

Article originally posted on HERE on July 25, 2023

Stubborn vacancies in the office sublease sector and murky outlooks on interest rates and back to work trends have challenged the metro Phoenix office market, but positive momentum during the second quarter could influence that trend, raising hopes for an end to seven straight quarters of negative local office absorption, according to the Q2 2023 JLL Phoenix Office Insight report.

Per the JLL report, back-to-work mandates and overall economic growth trends have helped to boost office leasing and slow the pace of negative absorption. During the second quarter, the rate of occupancy loss showed signs of slowing, with some submarkets like downtown Phoenix – one of the hardest hit submarkets during the pandemic – seeing positive absorption.

Overall market gains made through positive direct absorption were offset by the addition of new sublease space, however the majority of that space came from a single user, Phoenix-based Carvana, who added 292,119 square feet of sublease space to the market during the second quarter as it continues to shrink its local office footprint.

“We’re watching back-to-work, interest rate and sublease trends very closely, recognizing the collective impact they could have on office market health. The activity we’ve seen during the second quarter is an encouraging sign, underscoring the economic and population fundamentals that always make Phoenix a prime location for business creation and expansion,” said JLL Senior Vice President Brett Thompson. “Leasing activity in the Tempe and Camelback submarkets, new construction projects like The Grove and redevelopments like Bond underscore that strength and reflect the appetite that tenants in this market have for Class A space. While there is still uncertainty in the market, these indicators have the power to help create stabilization and potentially return Phoenix to positive office absorption.”

Although overall investment and leasing have stagnated, many owners looking to retain their existing tenants – or attract new ones – are making capital improvements to modernize their buildings with the latest in amenities and efficiencies, according to the JLL report. This creates opportunities for companies initiating back-to-work mandates and those looking to right-size their office needs.

According to JLL, the Phoenix office rental rate as of the end of Q2 2023 is up by 3.5% year-over-year. The overall vacancy rate sits at 23.7%. Sublease vacancy has reached 5.3 million square feet and year-to-date net absorption is -978,323 square feet.