Sublease Spike Ends Eight-Year Run of Positive Phoenix Office Absorption

Strong market outlook, positive year-to-date performance persists in light of fluctuations

The Phoenix office market has experienced its first quarter of occupancy loss in eight years, according to the newly released Q2 2020 Office Insight Report from the Phoenix office of JLL. However, the market continues to maintain positive long-term viability thanks to a diverse workforce, affordability and continued population growth.

According to the JLL report, the Phoenix market received 450,000 square feet of new sublease space during the second quarter, bringing the total amount of available sublease space in the Valley to more than 1 million square feet.

“About three-quarters of these move-outs were planned pre-COVID and are not reflective of the pandemic,” said JLL Managing Director and office specialist Mark Gustin. “But it does indicate a shift that we will need to work through. Fortunately we are in a strong position to do that. We’ve entered this downturn in a much different position than the last recession, with fundamentals stronger than they have ever been.”

Across the second quarter, metro Phoenix experienced 320,000 square feet of new company move-ins. The addition of sublease space brings overall office vacancy to 16.7 percent – as compared to 16.3 percent at the start of the year. Rents have remained steady at an average $28.16 per-square-foot.

The greatest impact of the sublease shift can be found in Class A properties, with nearly 315,000 square feet of space becoming available during the second quarter.

“A good portion of the sublease space that has become available is located in newer product with existing furniture, fixtures and equipment in place. This will be appealing to tenants as they can react quickly to near-term market fluctuations,” said Gustin. “It also puts Phoenix in a good position to attract more companies from out of state – particularly from markets like California, Chicago and New York, where serious regulatory and affordability challenges will remain even after this pandemic ends. This is where Phoenix can shine with long-term, viable solutions and is part of why we continue to see commercial real estate interest from both foreign and domestic entities.”

The JLL report points to an expectation for more sublease space to come to market over the next few quarters. Phoenix’s strong fundamentals could help cushion that blow, however, allowing Phoenix to rebound faster and potentially become one of the nation’s most attractive metros.

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