Positive Years Give Way to Signs of Strain in Phoenix

Population and job growth have boosted Phoenix’s office market in recent years, but the deteriorating economy is finally taking its toll. The employment situation has worsened in Phoenix, as it has in many other major U.S. metropolitan areas. The Arizona Department of Commerce reported that the city’s unemployment rate was 5.1 percent in August, a significantly higher rate than June’s figure of 4.3 percent, and higher again than the 3.2 percent recorded a year ago. Not surprisingly, demand for office space has slowed significantly, with the vacancy rate rising to 17.1 percent in the third quarter, compared to 12.9 percent in the same period a year ago, according to a report from CB Richard Ellis Inc. For the year, absorption is now a negative 54,778 square feet, and the report predicts that absorption will reach its lowest level since 2002, when the market absorbed 707,097 square feet. The average full-service asking lease rate for office space fell to $25.44 per square foot during the third quarter, compared to $25.71 per square foot in the second quarter. Despite all this, office construction remains at a high level, with total square footage under construction more than twice the 6.3 million square feet of new office space delivered since 2007. In all, 3.4 million square feet is now under construction, set for delivery by year-end 2009. Office investment sales, however, have slowed. According to a third quarter report from Colliers International, total sales volume in the third quarter was $99.2 million, compared with a second quarter figure of $160.3 million. Either because of this or causing this, the average price per square foot has taken a dive, falling to $138.52 per square foot in the third quarter from $208 in the second quarter and almost $268 in the first quarter of this year.