Market Posted Second Consecutive Quarter of Positive Net Absorption
Phoenix (May 19, 2026) – A recent Colliers report covering the first quarter of 2026 shows positive net absorption for a second consecutive quarter. The Greater Phoenix office market continues its post-pandemic recovery with strong leasing and a decline in total inventory as obsolete buildings are re-purposed.
The Phoenix market is experiencing tremendous economic growth from manufacturing and technology, which is now spilling over into the office market. Strong leasing activity, along with the delivery of Republic Services' 265,525-square-foot new headquarters, helped first quarter post the second strongest net absorption in nearly four years. First quarter net absorption reached 432,379 square feet. The Tempe submarket dominated the leasing activity in the first three months of 2026, accounting for nearly 35 percent of total square footage leased. Class A assets recorded 498,865 square feet of positive net absorption market-wide, while both Class B and Class C assets posted negative totals.
Direct vacancy dropped 60 basis points over the quarter to 14.5 percent. This was influenced by the removal of nearly 1 million square feet of inventory. Class A properties saw a 40 basis point decline in vacancy to 19.1 percent. For the first time in nine consecutive quarters, sublease space increased. A modest 33,178 square feet of sublease space was added, yet sublease space has decreased 36.7 percent since its peak of 7.8 million square feet in first quarter of 2024.
Total inventory of office space has been declining, as developers move forward with re-purposing obsolete office buildings to meet market needs. Three buildings traded in the first quarter 2026 to developers planning new usage.
Construction levels in the office market decreased to the lowest level, with just 184,500 square feet under way within two buildings. Both structures are build-to-suit developments with deliveries expected over the next two quarters. Limited available capital for speculative office development, coupled with the rental rates required to achieve acceptable investment returns, continues to suppress new construction.
Overall rental rates posted a small increase in first quarter, rising 1.33 percent to $30.52 per square foot. Class A assets recorded the largest year-over-year gain, rising 1.41 percent to $34.60 per square foot. The market is highly bifurcated, with Class A significantly outperforming Class B and Class C properties. Premier submarkets with highly amenitized Class A properties captured the strongest year over year rent growth. Camelback Corridor rents rose 6.3 percent to $44.79 per square foot, while South Scottsdale rents increased 4.1 percent to $41.16 per square foot. Two leases signed during first quarter set a new high watermark for the market, with starting rates exceeding $62.00 per square foot.
Sales volume declined 33.3 percent from fourth quarter 2025, but increased 53.7 percent year-over-year, reaching $353 million. This is still a 53.7 percent better performance than first quarter 2025. The average price per square foot paid during first quarter 2026 was $207. Tempe submarket led the quarter in sales activity, experiencing more than 30 percent of the total volume across seven transactions. The largest transaction of the quarter was the five-property "Rio West" portfolio totaling 296, 663 square feet that sold for $61.5 million. The largest single-asset sale was Thirty 03 (3003 N. Central Ave.), a 26-story Midtown tower that sold for $32.25 million. Three buildings sold during first quarter are slated for repurposing, which will remove more than 335,000 square feet from the existing inventory when they are placed under construction.
The Greater Phoenix office market continues its path to rebalancing. The push for employees to return to the office is more prevalent and is expected to strengthen as 2026 unfolds. While certain submarkets will continue outperforming others, the environment creates opportunities for tenants to secure space in lower performing areas at discounted rates. Strong support from economic development groups and general pro-business elements of our market are positioning us to attract out-of-state companies, particularly those seeking business-friendly regulations and partnerships with higher education institutions to sustain a robust labor force.