MARKET DRIVERS
Average asking rental rates grew slightly quarter-over-quarter (QOQ) and by 1.6% year-over-year (YOY), likely driven by increasing operating expenses and the influence of heavily amenitized Class A buildings pushing rates. Premium Class A buildings continue to dominate with average direct rental rates surpassing those of Class B and Class C properties by 30% and 50%, respectively.
Total office leasing activity continued to decelerate throughout 2024 with a QOQ decline of 9%, reaching 1.1M SF. Direct net absorption totaled 8.7K SF in 4Q24, reversing the trend of negative direct net absorption observed since 2Q23. However, the cumulative direct net absorption totaled -2.1M SF for 2024. Total vacancies currently stand at 24.8%, a 20 basis points (bps) decrease from 3Q24 and a 150 bps YOY increase.
Smaller office buildings (sub 50,000 SF) are showing a vacancy rate of 8.5% YTD. This trend reflects many users opting to downsize their footprint and explore smaller space options due to the ongoing prevalence of remote and hybrid work models, introduced during the Covid-19 pandemic.
YTD sales volume in the Phoenix office market has surpassed 5.6M SF, exceeding the total sales volume of 3.3M SF in 2023.
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.
Limited new construction has helped mediate a supply and demand imbalance but may create a shortage of limited premium office options as construction and financing costs have made it difficult to break ground.
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