Phoenix 2024 Office Market Overview

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.