MARKET DRIVERS
The Phoenix office market recorded a positive direct net absorption of 17.6K SF in 2Q25 with the largest direct net absorption recorded in Midtown with 86K SF, of which 63K SF consisted of two owner-user building sales.
Class A space saw a negative direct net absorption for the quarter of -42K SF but maintained a positive YTD direct net absorption of 429K SF. Both Class A and Class B spaces experienced an uptick of sublet absorption, totaling 177K SF and 90K SF, respectively.
Total leasing activity held steady in 2Q25, totaling 1.3M SF. Average direct rates increased slightly quarter-over-quarter (QOQ) from $30.72/SF FSG to $30.93/SF FSG.
Total vacancy stands at 24.3%, reflecting a 30 basis point (bps) year-over-year (YOY) increase. Class A total vacancy stood at 29.9%, Class B at 18.3%, and Class C at 8.3%. Class A rates continue to lead average direct rates at $33.58/SF FSG.
Sales volume in 2Q25 totaled 925K SF, a 52% YOY decline. Total leasing resulted in YTD total of 2.6M SF.
Economic Overview
In June 2025, the Federal Open Market Committee (FOMC) unanimously decided to maintain the target range for the federal funds rate. Median projections indicate an estimate of two rate cuts later this year, however, ongoing inflation concerns may delay that action in the short term.
NEAR-TERM OUTLOOK
Lease rates are expected to continue rising, driven by increasing operating expenses along with higher construction material and labor costs.
Certain traditional office buildings and large complexes are being repurposed to multifamily or industrial uses, driving an increase in office building sales for redevelopment. This trend benefits the overall office market by decreasing total inventory to mitigate supply and demand imbalances.
Some tenants are now considering traditional Class A buildings versus premium Class A buildings, due to rental rate disparity between the two.
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