The Phoenix office market, a prominent player in the real estate sector, has experienced a variety of trends and changes throughout the year, reflecting broader national patterns in office space development, investment, and usage. The year saw a palpable slowdown in construction activity within the metro area. According to CommercialEdge data, only nine new office projects broke ground in Phoenix, marking a significant reduction in anticipation compared to previous years. This slowdown has positioned Phoenix with one of the smallest under-construction pipelines among major U.S. metros by the end of October.
Despite the slowdown, Phoenix remains a top-ten market in terms of sales volume nationally. This impressive standing underscores a prevailing confidence in the city’s office sector. Investors continue to recognize Phoenix’s potential even as other segments, such as coworking spaces, follow national trends in usage and development. An emerging strategy to mitigate sector challenges is converting office spaces into residential units. This innovative approach highlights the adaptability of Phoenix’s real estate market in addressing evolving demands and needs.
Slowed Construction Activity
By the end of October, Phoenix had 555,850 square feet of office space under active construction. This volume represented only 0.4 percent of the city’s existing office inventory, trailing the national average of 0.9 percent markedly. Including projects in planning and prospective stages, Phoenix’s rate climbed to 1.9 percent—still notably below the national figure of 3.2 percent. Comparatively, Phoenix’s office supply remains modest, with other high-volume secondary markets boasting significantly larger pipelines. For instance, Austin leads the pack with 3.5 million square feet under construction, followed by San Diego, Dallas, Nashville, and the Bay Area. Meanwhile, Phoenix’s pipeline is only slightly ahead of Detroit and the Twin Cities.
This relatively low construction rate can be attributed to several factors, including cautious development approaches and strategic planning. Developers appear to be taking a measured stance, avoiding excessive supply that could exacerbate vacancy rates. Moreover, the trend towards converting office spaces into residential units, driven by the rising demand for housing, is diverting some potential office developments. These conversions not only help address the housing shortage but also provide a solution to the issue of underutilized office spaces, ensuring efficient use of real estate resources.
Key Ongoing and Completed Projects
Among the key ongoing projects, the most significant is SunCap Property Group’s Gilbert Spectrum’s Building 3, a 119,222-square-foot office building anticipated for completion by the end of the year. Additionally, HonorHealth Medical Campus at Peoria, a collaborative healthcare facility slated for completion in early 2025, marks another noteworthy development. These projects indicate continuous development efforts despite the overall slowdown in new construction, showcasing the resilience and commitment of developers in the Phoenix market.
In terms of completions, Phoenix saw 646,629 square feet of office space delivered across ten properties by October. Among recently finished projects is Levine Investments’ innovative property at Arizona State University’s Research Park in Tempe, a 135,000-square-foot office addition. This addition not only supplements the existing office inventory but also highlights the strategic expansion in tech and research-driven areas. These developments reflect the ongoing efforts to meet demand, attract new business, and support economic growth in the region.
Office-to-Residential Conversions
Addressing the rising vacancy rates and the challenges of offloading properties, office-to-residential conversions have sparked interest among developers. CommercialEdge’s Conversion Feasibility Index identifies 41 office properties in Phoenix as strong candidates for residential redevelopment, with 35 situated within Phoenix itself and six spread across Mesa and Scottsdale. This trend reflects a strategic shift in the market, aiming to repurpose underutilized office spaces to meet the growing demand for residential units. The successful implementation of such projects could significantly alleviate vacancy rates and contribute to the city’s housing supply.
The conversion of office spaces into residential units is not only a practical solution but also a strategic response to changing market demands. With various factors such as remote work reducing the need for traditional office spaces and a growing population driving housing demand, these conversions offer a dual benefit. They address the oversupply of office space while simultaneously providing much-needed residential units. This trend could potentially set a precedent for other cities facing similar challenges, demonstrating Phoenix’s proactive and innovative approach to real estate management.
Robust Investment Activity
Transaction activity in Phoenix’s office market remains buoyant with a total sales volume reaching $1 billion by October, marking an 18.5 percent increase year-over-year. This figure highlights trades involving 7.2 million square feet across 82 properties, placing Phoenix eighth nationally, with markets like Manhattan and the Bay Area leading the rankings. Notable recent transactions include the $97.9 million sale of 24th at Camelback II, a 302,209-square-foot Class A building, to Wide Open Excursions. This sale ranks among the largest office deals in Phoenix since 2022. The second most significant transaction was the sale of 24th at Camelback I for $86.1 million, shifting ownership from New York Real Estate Investors to Columbus Properties.
The strong investment activity demonstrates a sustained confidence in the Phoenix office market, despite the prevailing challenges. Investors are willing to commit substantial capital to high-quality office spaces, recognizing the long-term potential of these assets. This influx of investment not only bolsters the market but also stimulates further development and innovation. It underscores the resilience of the Phoenix office market and its capacity to attract significant investment, driven by a combination of strategic location, economic growth, and adaptive real estate practices.
Vacancy Rates and Redevelopment Efforts
Despite fluctuating dynamics, Phoenix’s office vacancy rate, as of October, was 18.4 percent, slightly below the national vacancy rate of 19.4 percent. This places Phoenix favorably compared to similar high-volume markets such as Austin, the Bay Area, Houston, and Dallas, each grappling with higher vacancy rates. Concurrently, efforts to enhance office space utilization and occupation included significant redevelopment projects like Vero Capital’s $29 million INISIO at Kierland in Scottsdale, expected to culminate by the year’s end. These efforts aim to maximize the effective use of existing office spaces while upgrading facilities to meet contemporary standards.
The relatively lower vacancy rate in Phoenix can be attributed to several factors. Strategic redevelopment projects like INISIO at Kierland play a crucial role in maintaining occupancy levels by offering modern and attractive office environments. Furthermore, the city’s continued economic growth and business-friendly policies attract new tenants and retain existing ones. These factors, combined with the aforementioned trends in coworking and office-to-residential conversions, contribute to a dynamic and adaptable office market, capable of navigating and mitigating the challenges posed by high vacancy rates.
Expansion of Coworking Spaces
The Phoenix office market, a key player in the real estate sector, has seen several trends and changes over the year, mirroring broader national patterns in office space development, investment, and usage. This year, there has been a notable decline in construction activity within the metro area. According to CommercialEdge data, only nine new office projects began in Phoenix, a significant decrease compared to previous years. As a result, by the end of October, Phoenix had one of the smallest under-construction pipelines among major U.S. metros.
Despite the slowdown, Phoenix remains a top-ten market in terms of national sales volume. This strong position highlights enduring confidence in the city’s office sector. Investors continue to recognize Phoenix’s potential, even as other segments, like coworking spaces, follow national trends in usage and development. A new strategy to address sector challenges is converting office spaces into residential units. This innovative approach underscores the adaptability of Phoenix’s real estate market in meeting changing demands and needs.