What is Next for Empty Offices in Metro Phoenix? Some Will Be ‘Losers’

Article originally posted on HERE on March 12, 2024

Office vacancy in the Valley remains high, as in-person office work never fully rebounded from the shift to remote work that came with the COVID-19 pandemic.

Some office experts said the future will show which buildings are the “winners” that remain useful and relevant, and “losers” that are no longer functional.

Office buildings could be going through the same cultural shift that large-scale retail buildings have gone through, making some of the older, larger buildings obsolete as working from home or splitting time between remote and in-office work has become more commonplace.

“It is evolving, and maybe it is going to look different,” Yesenia Felix, vice president of operations and designated broker for Cousins Properties Inc., said. Felix spoke on a panel at the Arizona chapter of the Urban Land Institute’s Trends Day event, discussing the outlook for office real estate.

Office vacancy remains high

According to research from real estate firm CBRE, office vacancy in the Valley at the end of 2023 was close to 25%, a slight decrease from the previous quarter.

Office sales have also slowed. Steve Lindley, executive managing partner at Cushman & Wakefield, said a normal year in Phoenix can have about 65 to 75 office building sales, and there were only 23 in 2023.

Bryan Taute, executive vice president at CBRE, said a certain sector of office buildings is likely dead or dwindling, especially aging buildings that have few amenities. Some users, like call centers, have likely moved to remote work permanently, and could leave the buildings vacant, he said.

“Adapting is complex and a hard thing to do,” Taute said.

Angela Johnson, executive vice president with K-Star said office buildings that had previously been a call center or back-office use can be more difficult to lease to another office user.

“There are going to be some losers and there are going to be a lot of them,” she said.

Location, building quality can be critical

Newer buildings in desirable locations have held strong with leasing and bucking the vacancy trend, Taute said.

“Location has proven through the last few years to be even more important,” Taute said. “Areas like Camelback and Scottsdale are performing well.”

Location and physical condition of the buildings have been some of the biggest determining factors to whether a building can remain viable as an office.

Conversions can be difficult

Taute said nationwide converting vacant office buildings into other uses like apartments has become a trend, but often it can be complicated.

“Multifamily conversion is a big topic of conversation nationwide,” Taute said. “It’s very expensive and the physical attributes are difficult.”

Adding food and amenities can benefit a building

If an office building seems worth investing in, Taute said adding food and beverage options and upgrading meeting spaces can make the building more attractive to businesses that might want to lease space there.

Some office owners have taken creative approaches to incentivize workers to work in the office. Cousins installed a beehive on the top level of the parking lot of one of its Tempe properties so tenants can get fresh honey and see how honey is produced, Felix said.

Taute said he does not expect to see a large wave of conversions without some kind of government incentive. One high-profile office building in Phoenix, located at Central Avenue and Camelback Road, has been in the process of conversion into an apartment building for years.

One of Cousins’ Tempe properties, Hayden Ferry Lakeside, located at Tempe Town Lake, has a building that was left completely vacant when Silicon Valley Bank collapsed, Felix said. That building is the oldest one at Hayden Ferry Lakeside, she said, and is now undergoing a remodel of all common areas and conference space.

“We are blending office with a little bit of hospitality,” she said. Cousins has held rotating art exhibits in an empty office suite in one of its other Tempe properties, 100 Mill, and other activities like yoga classes.