Phoenix Office Market Hits 15.2% Vacancy at Q2 End

PHOENIX-Office vacancy rates have edged up more than half a percentage point from the start of the second quarter, a reflection of the timid stance most business are taking while the national economy looks to find its footing.

The Valley’s overall office vacancy rate is 15.2% at the start of the third quarter, up from 14.6% at the Q2 start, according to a new survey by the Phoenix office of Grubb & Ellis Co.

“There is an up tick in vacancy,” Jeff Hartland, a vice president in the office group for Grubb & Ellis tells GlobeSt.com. “Companies that were expanding aren’t and there are people who are giving back space.”

While the space that’s vacant and available for sublease doesn’t show up on the survey, Hartland estimates it adds another 3.5% vacancy to the overall rate, which would make it actually closer to 18%. “It’s going to be a slow year,” Hartland says.

Absorption of available space has slowed considerably. There was just 236,700 sf of net absorption of office space in the second quarter, which was an improvement over the negative absorption of 2,800 sf during the first quarter.

“We are building too much,” Hartland says. “There is too much construction, but for the last couple of years we’ve kept up with it.” Not now. Five of the 11 submarkets in the Valley experienced negative absorption during the second quarter as well as for the year. Year-to-date net absorption is 160,000 sf.

Office development projects were well into the pipeline before the national economy slowed the leasing in the Valley and have gone forward amid decreased tenant interest. Nearly three million sf of new office space is under construction and another 3.3 million sf is planned.

The uptown market is suffering the most. The area, which has an office inventory of 8.5 million sf, had a negative absorption of 65,000 sf for the second quarter, coming on the heels of the negative 120,000 sf in Q1. There are hundreds of thousands of square feet of space that is available for sublease. “There hasn’t been enough flow in Uptown,” Hartland says. “It has just been slaughtered.”

The vacancy rate in Uptown Phoenix is 15.5%. The worst performing submarket is Mesa-Chandler, which has a 24.1% vacancy rate. Best performing areas include Camelback Corridor, with a 12.3% vacancy; Gateway, near the Sky Harbor International Airport, 11.8%; north Scottsdale, 11.2%; and northeast Phoenix, 12.1%. Lease rates have dropped in some areas, but held the line in the most popular sectors.

Despite the bleak second-quarter results, Hartland likes the long-term prospects of the office market. People still continue to move to Arizona, companies are still creating new jobs and the difficulties in California are sure to send some tenants here. He anticipates up to 18 months of below normal results for the Valley. “We don’t think it’s permanent,” he says. “It’s going to take some time to get out of it.