Three quarters of all office lases signed in metro Phoenix in Q1 2023 fell in the sub-10,000-square-foot range, according to the latest market report released by the Phoenix office of JLL. The activity demonstrates a continued preference for smaller speculative suites and plug-and-play sublease space – both office solutions that provide greater flexibility as tenants and landlords continue to navigate economic uncertainty.
That uncertainty also led to a deceleration in metro Phoenix leasing velocity and sales volume as users assessed their office needs and landlords looked to gauge the market before making long-term commitments.
“We continue to see a significant amount of leasing activity from occupiers in the 2,000 to 8,000-square-foot range,” said JLL Executive Vice President Trevor Pratt. “Sublease space absorption is also starting to improve, with subleases located in newer buildings and near amenities being the most popular.”
Available office sublease space – totaling 6.6 million square feet – now comprises one quarter of all metro Phoenix available inventory. Achieve and DoorDash introduced a combined 250,000 square feet of sublease space this quarter, and Silicon Valley Bank is expected to soon shed its space.
An affinity toward the plug-and-play nature of sublease space is helping to reduce its hold on the market, according to the JLL report. That is helped further by a number of large tenants including Union Bank, Newlife Wellness and Progress Residential who absorbed a total of 158,116 square feet of all sublease space in the first quarter, accounting for 20 percent of the period’s total leasing volume.
“The current interest rate environment is making sublease and spec suites look even more appealing to tenants,” said Pratt. “Construction costs are hopefully starting to level out, but there are still uncertainties surrounding costs and timing for tenant improvements that make these options a safer route.”
During the opening three months of 2023, average direct metro Phoenix office asking rents held steady at $29.52 per-square-foot. Yet despite an overall office market softening, the Valley continued to establish new high-water mark rents.
Tenants again paid premiums for modernized assets with best-in-class build-outs located in highly sought-after submarkets. For example, Esplanade II closed a 30,955-square-foot lease at $52 per-square-foot with Perkins Coie this quarter, driving positive absorption and rent growth for the Camelback Corridor submarket.
Looking ahead, JLL expects occupiers and landlords to continue to exercise caution and maintain defensive postures amid economic headwinds. A shift in the labor market could potentially lead to additional shrinking in office footprints and a simultaneous acceleration in return-to-office efforts. In the end, it is expected that Phoenix’s long-term fundamentals can withstand the short-term instability currently prevalent and eventually steer the metro market back toward a path of recovery.
Download JLL’s full Q1 2023 Phoenix Office Insight here.