Phoenix Office Market Report
MARKET DRIVERS
LEASING ACTIVITY slowed considerably in the fourth quarter, down 35% from the same time last year dropping to a new record low in almost 15 years. Demand is strongest in regions such as Downtown, Tempe, and Chandler. Although these areas command some of the highest rents in the market, businesses are now targeting prime office buildings to attract and retain employees.
DESPITE THE SLOW RECOVERY of the office market, rents in Phoenix have rebounded more quickly than in many major metros. However, the continuous record levels of availability in sublease space are softening rent gains in key submarkets such as Downtown and Chandler.
CONSTRUCTION STARTS in the office market have slowed significantly in the past couple years, recording at a 10-year low with just 1.3M SF in the construction pipeline. The development slowdown will help reduce any supply-side risk in the near future.
SALES VOLUME IN 4Q posted at a 50% decrease YOY, drawing early speculation that the rise in the local interest rates and upcoming recession could have a negative impact on investments moving forward into the new year.
ECONOMIC OVERVIEW
ACCORDING TO the Arizona Office of Economic Opportunity, Phoenix metro’s unemployment rate in November increased 20 basis points YOY to 3%. This is compared to the state’s adjusted rate of 4.1% and national rate of 3.7%.
THE AFFORDABILITY and diverse job prospects in the Valley have attracted many living in more dense and expensive cities. The labor market remains strong, although job growth is expected to decelerate in the coming year while population growth will continue to be one of the top in the nation.
NEAR-TERM OUTLOOK
THE FLIGHT to high-quality office space is a trend that will continue into the coming year. Companies are prioritizing employee proximity and focusing on plug-and-play buildings with attractive amenities.
THE PHOENIX METRO had the highest inflation rate in 2022 among the nation’s metro areas, although it experienced its first decrease in 14 months to 12.1% from 13% previously, while the national rate for October was 7.7%. The Phoenix market enters 2023 with cautious optimism, as inflation is expected to ease in the new year and interest rate increases may soften.
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Phoenix Industrial Market Report
MARKET DRIVERS
AN UNPRECEDENTED all-time high of 26M SF delivered in 2022, expanding the market’s inventory by almost 10%. The Phoenix metro ranks among the top five markets in the nation for industrial construction activity, with a massive 45M SF currently underway.
TAIWAN SEMICONDUCTOR Manufacturing Company (TSMC) invested $12B in North Phoenix when it committed to its first chip plant opening in 2024, and recently announced an additional $28B of investment in Arizona, increasing the total investment to $40B. This is the largest foreign direct investment in Arizona and one of the largest in the nation’s history.
INVESTORS AND DEVELOPERS continue to be highly confident in the Phoenix market, as the competitive advantage and growth drivers are stronger than ever. Buyer competition has put an upward pressure on pricing, with sales prices averaging an all-time high of $171/SF, up more than 50% from pre-COVID levels but still affordable when compared to the nearby West Coast markets.
ECONOMIC REVIEW
ACCORDING TO the Arizona Office of Economic Opportunity, Phoenix metro’s unemployment rate in November increased 20 basis points YOY to 3%. This is compared to the state’s adjusted rate of 4.1% and national rate of 3.7%.
THE AFFORDABILITY and diverse job prospects in the Valley have attracted many living in more dense and expensive cities in comparison. The labor market remains strong, although job growth is expected to decelerate in the coming year while population growth will continue to be one of the top in the nation.
NEAR-TERM OUTLOOK
THE PHOENIX INDUSTRIAL market’s performance in 2022 reflected the strength and consistent demand this market has shown cycle after cycle. With the low cost of doing business, proximity to major regional markets, and favorable demographics, investors remain bullish and will continue to seek out the market for quality assets.
TENANTS HAVE BEEN expanding their footprints in Phoenix at a breakneck pace and the market has set records for demand over the last couple years. This is expected to cool, however, as the record new supply is projected to slightly overwhelm leasing in coming quarters. Upward pressure on vacancies and downward pressure on rent growth should materialize, especially if effects from the cooling economy linger.
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