Metro Phoenix’s rising office vacancy rates expected to worsen

Posted By Mike Padgett

Oct. 20, 2008

Office space vacancies are highest in several suburbs of metro Phoenix, with total regional rates expected to worsen by mid-2009, according to new numbers released by Cushman  & Wakefield of Arizona.

The metro region’s overall vacancy rate rose to 18.8 percent at the end of the third quarter 2008, up from 14 percent a year ago and 17.2 percent three months ago.

And the worst is yet to come. The metro Phoenix market will need to absorb some of its new and resale housing inventory before the vacancies in the office market will decline, says Michael White, senior director with Cushman & Wakefield.

“We’ve hit a significant decline in our office market conditions with more difficult days ahead,” White says. “We anticipate overall vacancy rates to pass the 20 percent point at year-end and grow to as much as 25 percent by mid-year 2009.”

One of the bright spots in the report is the Central Business District, where the rate was 13.7 percent, up from 10.8 percent a year ago, but not as high as the rates in many suburbs.

The highest third-quarter suburban vacancy rates were:

• 25.9 percent in the Deer Valley area.

• 28 percent in the Scottsdale Airpark.

• 28.4 percent in the Southeast Valley’s Superstition Corridor.

• 33.2 percent in the Chandler-Gilbert submarket.

• 34.9 percent in the West Valley.

“Like every other city in the United States, we’re feeling the effects of an economic downtown,” White says. “The fact that approximately 18 percent of metro Phoenix’ employment base is in the construction and finance fields means that we will experience a disproportionate impact from recent events related to the housing and mortgage industries.”

As an example of the impact of the housing market’s downtown, White cited the Scottsdale Airpark, an area where about half of the 1.2 million square feet of new office space added in the past year went to homebuilder tenants.

With changes to the homebuilding industry expected as the market recovers, the office market is expected to suffer “permanent losses to occupancy from those categories of business,” White says.

The rise in vacancy rates is pushing down rental rates, which are good for tenants. White says rates have dropped in recent months by as much as 30 percent, when lease concessions, tenant improvements and other factors are included.

Oct 20th, 2008

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