Posts negative net absorption but swift recovery expected in 2021
The Greater Phoenix marketplace posted 143,434 square feet of negative net absorption during the final three months of 2020. This followed an astonishing run of 34 consecutive quarters of positive net absorption. This negative net absorption is directly attributed to companies exploring the idea of entirely working from home, subleasing a portion or all of their space.
Office tenant strategies ranged from signing long, 10-year leases to lock in rates to signing short-term leases as a method to buy time and ride out the pandemic. Despite these unprecedented actions in the market, Greater Phoenix posted positive net absorption for 2020 of 582,121 square feet. Sublease availability decreased slightly at the end of the year, following a peak in third quarter; however, year-over-year sublease space is up 91 percent.
Seven of the city’s 10 largest leases this year took place in the first and fourth quarters. These transactions occurred pre-pandemic and after the vaccine was approved. This bodes well as we move into 2021, with vaccinations being broadly distributed in the first six months.
Direct vacancy rates increased in fourth quarter 2020 to 13 percent, which marks a 30-basis-point increase during the quarter and 80-basis-point elevation over the year. Office vacancy had been steadily trending down until 2020, and is now on an upward trajectory. Vacancy hit an all-time low in fourth quarter 2019, at 12.2 percent and increased each quarter of 2020. The availability of sublease space increased significantly in the Class A sector, rising 4.1 percent during fourth quarter and 125 percent throughout 2020. Sublease space now represents 1.17 percent of the total office inventory.
Evaluating the larger office submarkets (over 1 million Class A square feet) in the metro area, Tempe finished 2020 with the lowest vacancy at 6.2 percent. The Airport Area at 9.5 percent and Paradise Valley at 9.8 percent round off the top three submarkets. During fourth quarter, sizable move-outs by American Express and McKesson placed more than 200,000 square feet of vacant space back on the market.
The Southwest Phoenix area holds the top position for lowest vacancy of all office submarkets at just 4.8 percent. This is a decrease of 80 basis points during 2020, and is attributed to the fact this submarket is primarily comprised of government-owned or occupied office space.
Chandler, for the second consecutive quarter, posted the largest decrease in vacancy for the year, down 5.8 percent to just 11.6 percent vacancy. Chandler currently has 485,000 square feet of new space under construction and delivered more than 1.5 million square feet of new inventory since first quarter 2019.
Construction activity remained steady during fourth quarter with projects that were started earlier in the year. Three new projects were delivered this quarter, totaling 360,507 square feet, which brings total deliveries for 2020 to 2,327,588 square feet. No new projects were started during fourth quarter.
Scottsdale Airpark is the most active submarket in the construction realm with 785,111 square feet currently underway. The new projects in Scottsdale Airpark are 45 percent pre-leased. This is a decrease from the previous quarter because Nationwide gave back more than 170,000 square feet of direct space.
Downtown delivered a 227,113-square-foot building that is 54 percent leased to ASU. This is just the third Class-A building constructed in downtown since 2010.
Rental rates increased year-over-year by 3.5 percent but declined 0.5 percent during fourth quarter to $27.67 per square foot. Class A building rental rates decreased 1.09 percent during fourth quarter but increased 1.76 percent overall during 2020 to $31.83 per square foot. Class B rates increased during the quarter and over the year to $24.83 per square foot. Job growth and a recovery in the office market during 2021 will return rental rates to a rising trend.
Investment sales of office soared to more than $570 million late in 2020, following lower sales in the first three quarters of 2020 that reached only $647 million combined. Tempe became the top submarket for investment sales with the trading of The Grand Phase II. The property, fully occupied by DoorDash, sold for $187 million ($522 per square foot).
During the pandemic companies creatively found ways to work remotely. Employees found new ways to collaborate with coworkers and businesses evaluated some permanent work-from-home arrangements. Once the vaccine has been broadly distributed and returning to office space is deemed safe, companies will begin bringing employees back for personal interaction and peer-to-peer guidance that is invaluable for career development and growth.
Because many tenants facing lease expirations have opted for short-term, 12-month extension solutions, we are creating pent-up demand for new deals that will likely be executed in 2021 and beyond.
Phoenix is moving up to be a top tier market on the national stage. In addition to those existing Greater Phoenix tenants executing new leases, we are now attracting more new-to-market requirements than ever before. Out-of-state companies seeking space in our city are coming from a wide range of states, primarily California, but also from the East Coast.
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