"Consolidations and closings of various companies have placed a sizeable amount of tenant-controlled sublease space on the market," says Tim Whittemore, senior director of Cushman & Wakefield of Arizona Inc. The Valley's overall office vacancy rate has reached 17.6%, compared to 13.1% six months ago. The direct vacancy rate is 14.8%, up from 11.5% at the 2000 close.
As poor as the market seems to be performing, the second quarter was much better than the first and points toward a brighter picture by year-end, Whittemore tells GlobeSt.com. He bases his call on the region's diverse economy, continued job growth and in-migration. "We're fortunate that we were not 'dot-com centric.' Areas such as San Francisco, Seattle and Silicon Valley have been heavily hit by the nation's economic downturn and they're not yet seeing the light at the end of the tunnel," he adds.
"Our increases in vacancy can be attributed to two major factors," says Whittemore "Approximately 1.3 million sf of new space has been completed this year and net absorption of space is in the negative range. This illustrates that we're adding significant supply during a time of negative demand."
According to the Cushman & Wakefield survey, net absorption for the year totals 538,000 sf. The healthiest areas are near the Scottsdale Airpark and Mesa; both have positive absorption for the year. Hardest hit has been the Camelback Corridor, where there is more than 300,000 sf of negative absorption at the mid-year mark. Nearly half of that negative net absorption can be attributed to the departure of American Express from the submarket, which put 140,000 sf onto the market.
In addition to the 1.3 million sf of new space, there is three million sf under construction. "Some of the Valley's suburban areas are at risk of overbuilding," Whittemore says. "These include Deer Valley, Tempe and Scottsdale Airpark. These areas each have large amounts of new space under construction with little pre-leasing, at a time when demand is down."
One of the areas that benefiting from the economic downturn is the Midtown area of Phoenix. The submarket, which runs along Central Avenue, saw its vacancy rate drop to 16.3% at the end of the second quarter, down from the 17.5% at the Q1 close. "Midtown appears to be benefiting from the woes of other areas," Whittemore says. "The gap in rates has widened between Midtown and more expensive suburban markets. Midtown offers more variety of space, better tenant improvement allowances and more cost-effective rates."
Whittemore says some Valley property owners are offering some concessions on first-generation office space. "We anticipate rates will drop even further by year-end and owners will compete more heavily for tenants," he says.
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