Q3 2022 Office Space Report: Phoenix, AZ
Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.
Phoenix’s office space market has become a top destination for those looking to combine economic opportunity with an affordable lifestyle. As part of the Sunbelt region, it continues to attract people from coastal gateway markets seeking new opportunities.
Phoenix is an attractive hub for businesses and employees due to its dynamic economy, low cost of business operations compared to other metropolitans, abundant educational opportunities through universities and community colleges, and strong population growth.
Over the last 12 months, divergence from previous trends has been observed in Phoenix Metro, with job growth surging across multiple industries while financial activities experienced a decline.
However, despite current economic uncertainty, prospects remain positive for continued development and prosperity in the region moving forward.
General Area Overview & Demographics
Phoenix, Arizona, is the largest city in Arizona and the fifth most populous city in the United States. Phoenix covers over 500 square miles and has a population of nearly 1.7 million people. Phoenix’s metropolitan area is home to over 4.7 million people, making it one of the largest cities in the country.
Phoenix has a rich cultural diversity; 35% of residents identify as Hispanic or Latino, 5% are African American, 3% are Asian and Pacific Islander, 2% are Native American or Alaska Native and 2% identify as two or more races. Phoenix also has several large universities, including Arizona State University, which enrolls over 70,000 students each year.
The Phoenix Metro Area’s economy relies heavily on industries related to technology, healthcare, education, hospitality, real estate management, and construction services. Major employers include Intel Corporation, Honeywell Aerospace, and Banner Health System.
Known for its warm and sunny climate, Phoenix is a great destination for outdoor activities such as hiking, biking, tennis, and golf. Phoenix is home to some of the most beautiful parks in Arizona, including Phoenix Mountains Park & Recreation Area and South Mountain Park, both of which offer miles of trails.
Summary of Phoenix Office Space Performance in Q3 2022
With an encouraging third quarter of 2022, the Phoenix office market saw a positive activity swell as companies sought to capitalize on their long-term ambitions. This momentum indicated that businesses were well prepared for employees’ return, prompting optimism within the market.
The surge of office activity and the completion of new office space in Phoenix over recent months generated over 900,000 square feet of absorption and reduced direct vacancy by a significant 70 basis points.
During Q3 of 2022, the direct vacancy rate decreased slightly from Q2 2022’s 17% to 16%.
The suburban areas of Metro Phoenix are experiencing higher absorption and leasing totals than Downtown. Tempe, Scottsdale, and Camelback Corridor show increased activity in their respective office hubs.
There is an ongoing demand for high-quality office space, but users are opting to lease smaller portions due to pandemic impacts such as hybrid work-from-home and office schedules and inflationary pressures.
What are Office Space rents like in Phoenix?
Phoenix’s office space rental rates have shown solid, sustained improvement over the past quarter, with a $28.90 per square foot cost, a 4% increase compared to last quarter.
With the desire for better quality and amenities driving the market, Class A assets saw the highest price increase, increasing to $32 per square foot, a 1.04% increase.
Purchase & Leasing Activity
Despite the overall trend of increasing investment sales this year, the third quarter volume was just over $590 million, below the totals for the quarters prior. Year-to-date figures currently total over $2.2 billion, which is 30% higher than the same time period last year.
Phoenix’s office space prices decreased notably, finishing at $173 per square foot, 6% percent lower than the previous quarter.
Space in the 5,000 to 12,000 square foot range is currently experiencing the highest demand in leasing activity.
Notable Office Space Deals in Phoenix in Q3 2022
There were several deals for Phoenix office space this quarter.
- Crosspoint at Beardsley sold 515,000 square feet for $93,000,000;
- Camelback Collective sold 116,000 square feet for $66,350,000; and
- Camelback Center sold 240,000 square feet for $61,800,000.
These are a few among other transactions that took place.
New Office Space Development Activity in Phoenix in Q3 2022
In Q3, there were three projects totaling 470,000 square feet delivered for office space in Phoenix, bringing completions for 2022 to 760,000.
Phoenix currently has the lowest amount of office space under construction in the last five years, with 1.2 million square feet in the pipeline.
Scottsdale Entrada, a 250,000-square-foot Class A building with office space, is the largest delivery for office space in Phoenix this quarter.
Market Forecast for Phoenix’s Office Space Market
Phoenix’s office market is being driven by its growing and returning labor force.
However, Phoenix’s office space absorption streak looks set to end in Q4 of 2022, when two major vacancies are expected.
While speculative construction will likely hold steady at lower levels low for office space in Phoenix because of work-from-home models, increasing asking rental rates, particularly for Class A product, will remain strong.
Takeaways for Office Space Investors
The Phoenix office space market seems to be holding steady at modest levels.
While construction sits low, indicators this quarter point to investing in Class A spaces for lease being the best option for someone interested in getting this market.
Each investor will need to conduct their own research to determine what decisions are best moving into 2023.
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