MARKET DRIVERS
ALTHOUGH LEASING ACTIVITY has slowed in the last few quarters, there is a recent shift in where the market is experiencing demand. The strongest regions in Q1 were in the Camelback Corridor and Scottsdale submarkets that hold some of the highest rents in the market. Businesses are willing to pay a premium to operate in high-end office parks to entice workers back to the office with appealing amenities in a desirable location offering retail and restaurants in close proximity.
SUBLEASE AVAILABILITY increased over 30% YOY, posting at a record high of approx. 7.25M SF. Many tech companies that expanded in recent years have since given back space, after many businesses announced layoffs at the start of the year.
SALES VOLUME in the first quarter posted at a new 10-year record low, illustrating how the rise in interest rates may have begun to negatively impact investment activity. Despite the low volume, sales prices remain high, which reflects investors likelihood to favor high-quality space as many businesses seeking space are drawn towards top tier amenities and finishings for their employees.
ECONOMIC OVERVIEW
ACCORDING TO the Arizona Office of Economic Opportunity, Phoenix metro’s unemployment rate in February decreased 20 basis points YOY to 2.9%. This is compared to the state’s unadjusted rate of 3.2% and national rate of 3.9%.
PHOENIX RANKED third in the nation for job growth in the start of the year, with a net gain of over 19,000 nonfarm jobs in January. Additionally, Phoenix metro’s labor market now has nearly 100,000 more jobs locally than pre-pandemic levels, making it the fifth highest gain the nation.
NEAR-TERM OUTLOOK
THE AMOUNT OF SUBLET AVAILABILITY is still a concern and leasing activity over the next few quarters will need to outperform last year’s levels to stabilize the vacancy rates in the market. One factor that will help keep vacancies from increasing notably is the depleted development pipeline, standing at its lowest levels in over 10 years.
THE PHOENIX OFFICE MARKET will remain slow throughout the next few quarters as it shakes out the long-term negative effects of the pandemic, coupled with the economic downturn. The sustained remote and hybrid work held by many companies will ultimately result in roughly 10-15% less office use going forward.
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