Kidder Matthews Reports on Phoenix Office – 4th Qtr. 2025

Phoenix Office

PHOENIX, AZ (January 13, 2026) — Phoenix’s office market ended 2025 with measurable momentum, posting positive net absorption and steady leasing activity as tenants continued to favor newer, amenity-rich environments. While overall vacancy remains elevated, it improved year over year, and Class A demand was a key bright spot, supported by both direct occupancy gains and sustained sublet activity. Against a backdrop of major statewide business wins and job/capex commitments, market conditions are increasingly defined by a “flight-to-quality,” limited new construction, and ongoing conversions and redevelopments that are gradually tightening inventory. Looking ahead, the market is expected to see continued tenant migration across favored submarkets, active owner-user interest in well-located suburban nodes as rate clarity improves, and selectively returning investment activity driven by repricing and value-add opportunities.

Market Drivers

  • The Phoenix office market recorded a positive direct net absorption of 211K SF in 4Q25, led by Tempe, which recorded the largest gain at 184.6K SF. Class A space posted positive direct net absorption of 413K SF for the quarter and maintained a positive 2025 direct net absorption total of 1M SF. Sublet demand remained strong, with Class A sublet absorption totaling 155K SF. Overall direct and sublet net absorption in 4Q25 reached 270K SF.
  • Total leasing activity remained steady in 4Q25, totaling 1.8M SF. Average direct rates remained flat QOQ at $30.97/SF FSG. Total vacancies stand at 23.6%, reflecting a 140 bps YOY decrease. Class A total vacancy stood at 28.1%, Class B at 18.9%, and Class C increased slightly to 10%. Class A rates continue to outpace the average direct rate at $33.89/SF FSG.

Economic Review

  • In 2025, the Arizona Commerce Authority and its economic partners secured 90 competitive projects, committing to 27,749 jobs and more than $34B in capital investment. Arizona’s strong business climate attracted major companies in 2025, such as Comtech, Dutch Bros, and Cognite, which are targeting the Phoenix market for corporate expansion and headquarters relocations.

Near-Term Outlook

  • Highly amenitized buildings continue to vie for quality-focused tenants desiring an upgraded office image and experience. This “flight-to-quality” will disrupt occupancy in older, more traditional Class A and Class B properties, prompting tenants to move between desirable submarkets. Limited new office construction, combined with ongoing conversion and redevelopment of underperforming assets, will continue to tighten overall office inventory.
  • Owner-user demand is expected to remain active across well-located suburban submarkets as interest rate clarity improves and businesses seek long-term control of occupancy costs through ownership rather than leasing. Most of which are taking advantage of low down payments SBA loans. Investment activity is selectively returning, driven by repricing, motivated sellers, and buyers targeting stabilized or value-add office assets with strong tenancy, manageable rollover, and replacement cost advantages.

The information in this report was compiled by the Kidder Mathews Research Group.

Data sources: CoStar, AZ Commerce, Arizona Labor of Statistics, AZ Big Media, Phoenix Business Journal

For more information, contact Kidder Mathews Vice President of Research, Gary Baragona, 415.229.8888