Vast Majority of Phoenix’s Office Sublease Space Sits Vacant

Article originally posted on CoStar on September 14, 2023

Availabilities Surge As Companies Reevaluate Their Footprint Needs

A glut of available sublease space has accumulated in the Phoenix office market as users downsize due to hybrid work arrangements and economic uncertainty.

The share of that vacant space has steadily climbed over the past three years and now sits at the highest level on record.

More than 7.5 million square feet of office space is available for sublease as of the second quarter, according to CoStar data. More than 80% of that square footage is empty as firms make alternative plans that do not require the previous footprint. That figure has more than doubled since the fourth quarter of 2019 when about 34% of sublease space was vacant.

Finding tenants to take over larger office spaces has been challenging. Some users have held off on making major leasing decisions until they’ve solidified their workplace strategy. Also, potential tenants may be hesitant to sign large subleases that only have a few years of term remaining.

As a result, since 2022, CoStar has tracked about 14 sublease signings for over 25,000 square feet. More than 60 of the Valley’s office buildings today have sublease availabilities of that size.

The surge in sublet availabilities is driven by downsizings and office closures from technology and insurance firms. In the decade leading up to the health crisis, Phoenix was a popular option for expansion, particularly in Tempe and Chandler. These same offices have been the first to close as some firms opt for remote configurations.

Centene Corp., for example, fully occupied a new 236,130-square-foot office in 2018 at Tempe’s Liberty Center at Rio Salado, a mixed-use development. The St. Louis-based insurance company listed the entire building to the sublease market last summer following a public announcement that they will reduce 65% of their leased office space nationwide as they “adapt to a more modern work structure.”

Moving forward, the glut of sublease availabilities is expected to weigh on the office market. On average, sublet space rents at about a 20% discount to direct space, providing tenants with affordable options and hampering rent growth. It also could add more vacant office space to the market as subleases roll over without securing a renewal or replacement tenant. Phoenix office vacancy already has climbed from about 11.4% entering the pandemic to 15.5% midway through 2023, and forecasts call for further increases over the short to midterm.