MARKET DRIVERS
The Phoenix office market experienced positive direct net absorption of 150K SF in 1Q25. The submarket with the highest net absorption was recorded in Tempe with 188K SF. Class A buildings continued their upward trend in positive direct net absorption, reaching 212K SF in 1Q25, up from 84K SF in 4Q24. In contrast, Class B buildings experienced a deeper decline, with direct net absorption falling from -69K SF in 4Q24 to -122K SF.
Total leasing activity held steady in 1Q25, totaling 1M SF. Average direct rates decreased slightly quarter-over-quarter (QOQ) from $30.86 full service gross (FSG) to $30.58 (FSG).
Class A buildings continue to dominate with average direct rental rates surpassing those of Class B and Class C properties by 30% and 65%, respectively. The overall average direct rental rate stands at $30.58 (FSG), reflecting a slight QOQ decline from $30.86 (FSG). Premium, amenity-rich Class A buildings are driving rental rate growth, averaging $38.61 (FSG). Within the Phoenix Metro area, the highest rents are observed in the Camelback Corridor and Tempe submarkets.
Total vacancy currently stands at 24.4%, a 60 basis points (bps) decrease from 4Q24 and a 50 bps YOY increase. Sub 50K SF office buildings show a vacancy rate of 11.7%, 320 bps higher than 4Q24. Total Availability QOQ decreased by 80 bps to 20.4%.
Sale volume in 1Q25 totaled 660K SF, 58% down QOQ and 37% down YOY.
Economic Overview
According to the Arizona Office of Economic Opportunity, Phoenix metro’s unemployment rate in February increased by 60 bps YOY to 3.6%. The increase is due to a rise of jobseekers entering the labor force alongside a slowdown in hiring momentum.
NEAR-TERM OUTLOOK
In the near term, upcoming loan maturities will present a potential risk as a significant amount of CMBS debt is set to mature within the next 12 months. This may lead to a resurgence in sales transaction activity and as well as distressed sales throughout 2025 and into 2026.
Traditional office buildings or large complexes, such as Park @25th and Crosspoint, are being repurposed as the shift to remote and hybrid work models drives an increase in office building sales for redevelopment, ultimately benefiting the overall office market by reducing total inventory.
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