Office Sales Volume Hits Highest Level in Six Quarters
PHOENIX, (August 23, 2024)—Large move-outs in the Greater Phoenix office market overshadowed strong leasing activity during the second quarter of 2024, according to a report from Colliers. These move-outs and expiring sublease space that turned over to direct vacancy created negative net absorption in the market. Office building sales volume escalated during the second quarter, posting its highest level since the fourth quarter of 2022.
The second quarter wrapped up with negative net absorption at -178,695 square feet, bringing the first half total to -751,449 square feet. Leasing activity during the second quarter was very healthy, with nine of the top 10 new deals being companies new to the market or expansions within the market. Unfortunately, leases expiring on the larger sublease space in the market have placed incredible downward pressure on net absorption figures. While companies are still struggling to bring employees back to the office, Greater Phoenix experienced a strong lease during second quarter. Dutch Bro’s signed the quarter's largest lease, agreeing to 136,426 square feet at 1930 W. Rio Salado Pkwy. The company previously occupied 6,500 square feet and now will be bringing more than 40 percent of its support staff nationwide to the new location. Approximately 310,538 square feet of sublease space was taken off the market during second quarter with an average lease size of 7,574 square feet.
Direct vacancy rose for the fifth consecutive quarter to 15.2 percent, marking a 10 basis point increase quarter-over-quarter. Total available space rose 130 basis points year-over-year ending at 19.9 percent. Go Daddy will give back 150,000 square feet of space at ASU Research Park, following its 80 percent downsizing new lease at 100 Mill. Currently only 10 percent of the buildings in the market with subleases available account for more than 50 percent of the total sublease space.
Rental rates are now feeling the pressure of increased vacancy, posting the first quarter-over-quarter rate drop since second quarter 2021. Average rates dropped 0.3 percent to $29.76 per square foot, still a 1.78 percent year-over-year increase. Class A assets posted the largest increase year-over-year, jumping 3.5 percent and ending the quarter at $33.45 per square foot. Rates in top-tier office buildings in highly desirable submarkets continue to increase faster than the rest of the market.
Construction of new office space has been thwarted by the limited to non-existent availability of construction lending. Currently, there are 767,558 square feet under construction in Greater Phoenix, and the projects are 48.5 percent pre-leased to an aerospace user, medical space users, and financial services users. Two buildings were completed during the second quarter, totaling 74,124 square feet. Both projects are in the West I-10 submarket and delivered 75.5 percent pre-leased. Year to date, the market has delivered 113,124 square feet of new office space. Tempe has offered the most square feet since 2022, adding new inventory of 438,847 square feet.
Investment sales volume during the second quarter totaled $388 million, marking the highest level in six quarters. This was more than double the first quarter's activity, increasing 105 percent. Year-to-date sales volume reached $577 million, posting a 40.5 percent increase compared to the first half of 2023. The average price per square foot increased 6.4 percent quarter-over-quarter to $193. Camelback Corridor led the second quarter with the highest sales volume, driven by the year's largest sale. 24th at Camelback, a 308,827-square-foot trophy building sold for $86.1 million. Columbus Properties purchased the asset from New York Live Investment, marking a $13.9 million loss following its purchase in 2018.
Despite the challenges of our Greater Phoenix office market, the city is doing quite well compared to other national locations. We are beginning to experience more requirements for headquarters relocations and multiple expansions within the marketplace. Landlords with larger floor plates that have been vacant for multiple quarters are beginning to add amenities and break up the spaces to attract smaller tenants. Heavily parked back-office properties that have languished vacant are being evaluated as redevelopment opportunities. Pressure on office vacancy will continue as the economy grapples with the hybrid work model and the resulting decline in tenant square footage needs.
Find the full report here.