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In the second quarter of 2024, Phoenix experienced over 630,000 square feet of new leasing activity. However, the office market faced challenges as significant tenant move-outs and expiring sublease agreements transitioned into direct vacant spaces, leading to a negative net absorption of -178,695 square feet. The direct vacancy rate increased slightly by 10 basis points, reaching 15.2% by mid-year. Despite these challenges, office investment sales hit a six-quarter high, totaling $388 million in volume.

Key Insights
Investment Sales Surge: Office property sales reached $388 million, the highest since late 2022.
Slower Rent Growth: Average rental rates grew modestly, up 1.7% year-over-year to $29.76 per square foot.
Sublease Space Decline: Available sublease inventory decreased by 177,933 square feet from the previous quarter.
Labor Market Dynamics: The Phoenix metro area expanded its labor force by 52,700 workers, a 2.2% increase year-over-year as of February 2024. Gains in Professional and Business Services jobs (0.46%) offset declines in Information (-4.9%) and Financial Activities (-0.75%).
Leasing Activity & Construction
Although leasing demand remained strong, a combination of large tenant relocations and sublease expirations contributed to increased direct vacancy. Rental rates saw their first decline since mid-2021, reflecting softer demand. Construction levels stayed subdued, while investor interest boosted capital markets activity.

Market Outlook
Phoenix’s office market maintains a positive outlook compared to national trends. Key developments include:

Growing interest from corporations considering headquarters relocations.
Landlords reconfiguring large, vacant floorplates to appeal to smaller tenants by incorporating amenities.
Opportunities to redevelop underutilized office properties—such as heavily parked back-office spaces—into industrial or data center facilities.
Challenges posed by hybrid work models, which continue to reduce tenant footprints, contributing to higher vacancies.
Phoenix’s consistent population growth and expanding labor force provide a solid foundation for long-term market resilience, even as the industry adapts to evolving work patterns and economic conditions.

“Our members remain cautiously optimistic,” shares Clark Princell, CEO and president of Valley Partnership. “If I had to choose a market to weather uncertain times, this would be it. We’re experiencing significant population growth alongside strategic post-recession initiatives that have laid the groundwork for our thriving economy. Industries like semiconductors, electric vehicle batteries, and logistics are driving this transformation. Even if a national downturn occurs, Arizona is better positioned than most states to navigate it.”

Princell notes that while industrial growth has decelerated, sentiment among stakeholders has improved compared to four or five months ago. Molly Carson, executive vice president and Southwest market leader for Ryan Companies, echoes this view. Although the pace has moderated from what she describes as a “frenzied” period, Carson sees it as a healthy adjustment.

“We’re no longer riding the wave of the 18-month boom, and honestly, that’s a positive shift,” Carson explains. “The market is stabilizing, and what we now consider ‘normal’ is exceptional when compared to Phoenix’s historical performance and national trends. It’s less of a decline and more of a leveling out.”

During the pandemic, supply chain disruptions led to surging costs and prolonged project timelines. Carson observes that construction expenses have largely stabilized, though slight increases still occur periodically.

“Over the past few months, we’ve gone to hard bid several times and noticed increased competition, with firms showing more enthusiasm. Staffing shortages aren’t as prominent as before,” Carson adds. “As a developer, I always want lower costs, but the current pace feels manageable and sustainable.”

“Our members of Valley Partnership maintain cautious optimism,” says Carson, acknowledging that while historically low interest rates previously spurred Phoenix’s rapid growth, the current high-rate environment has tempered the market. She notes that this slowdown, while challenging, could bring long-term benefits.

“Sometimes you need tough medicine, even when it’s hard to take,” she explains. “I believe we’re nearing the end of this period of elevated rates. Capital has been constrained, and current interest rates are tough to handle, but over the past two months, we’ve seen signs of improvement. Some major institutional investors, who stepped back during late 2023, are reengaging with the market.”

Teeter agrees, pointing out that rising interest rates have had a significant effect on various development aspects. Many properties face expiring loans, such as bridge or construction financing, which now require conversion to permanent funding.

“The sharp rise in rates since these properties were purchased or initiated will create movement in the market,” she says. “It will be interesting to see if lenders collaborate with borrowers to find creative solutions or if we start seeing more foreclosures.”

Carson believes the market’s slower pace compared to the last two years signals a healthy stabilization. “Slow and steady wins the race,” she remarks, adding that future growth hinges on showcasing Arizona’s robust water management strategies and incorporating more sustainable materials in development projects.

“We also need to prioritize heat island mitigation,” Carson says. “Remaining both business-friendly and community-focused is essential. I’m optimistic about institutional capital shifting back into housing, especially multifamily projects at varied price points.”

Teeter highlights strong user demand as a stabilizing factor, even as transactions take longer to finalize due to more careful decision-making. She underscores the importance of passing initiatives like Proposition 479 to ensure ongoing investment in infrastructure, a key driver of the region’s growth.

“Power availability will be a critical factor in project feasibility,” she explains. “Industries like manufacturing and data centers require substantial energy, and climate changes are further impacting power usage. Still, Arizona’s diverse and dynamic economy makes it an appealing destination for global businesses. We’re on the radar of companies that never considered us before, and our story is one of resilience and opportunity. I remain highly optimistic.”

A sprawling $2 billion mixed-use project, CityNorth, is reshaping north Phoenix with plans for a new hotel, corporate campus, residential communities, and retail spaces.

Spanning nearly 100 acres, this site has faced a long journey to development since its conception before the Great Recession. Delays were caused by economic downturns and legal disputes, leaving the property underutilized for years.

Initially envisioned as a high-end retail hub with brands like Nordstrom, Bloomingdale’s, and Macy’s, the original concept faltered. The site later changed ownership multiple times until Crown Realty & Development, based in California, acquired it in 2019. Since then, the firm has made strides in preparing the land, adding critical infrastructure, and securing zoning approvals from the City of Phoenix.

“Our focus was on readying this site for complete development,” explained Rick Carpinelli, Crown Realty’s senior vice president of acquisition and development.

When fully realized, CityNorth will feature millions of square feet of space, including shops, dining establishments, offices, and a vibrant residential main street. The ambitious plans include provisions for:

3,416 housing units
1.8 million square feet of office space
100,000 square feet of retail
1,000 hotel rooms With building heights reaching up to 140 feet, the project is set to become a defining commercial center.
Situated near Desert Ridge Marketplace and adjacent to High Street along 56th Street, CityNorth is a key component of the broader 5,700-acre Desert Ridge master-planned community. Development is projected to unfold over the next decade, creating a dense urban core for north Phoenix.

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News | Phoenix commercial real estate sales volume hits six-quarter high  CoStar Group