The losses aren't Valleywide and varies according to product type. The Southeast Valley's manufacturing vacancy is a mere 3.2% while office-service space in Tempe is 5.2%. On the other side of the spectrum, the South Mountain area has a 36.2% vacancy in office-service product while Sky Harbor-Central Phoenix has 28.1%. Blame it on delivery of new product and slower-than-expected lease-ups in the Cotton Center, says the report.

Construction is comparable to 2000's 7.1 million sf of deliveries, according to the analysts. This year, 2.1 million sf of industrial space has come on line and another 5.3 million sf in 81 buildings are under construction. "The good news is that construction is slowing. Lenders have reined in their money," says Klonoski. And, a number of projects were tabled until a turn-around is evidenced.

Existing market conditions are more a byproduct of over-leasing than overbuilding, Klonoski assesses. North Tempe and Southwest Phoenix submarkets posted the largest losses, each accounting for more than one million sf year-to-date. About 3% to 4% of the southwest's vacancy involves short-term space that is practically "unleasable" so it's just sitting idle and waiting for rollover. "We likely will see more consolidations on that side of town," Klonoski predicts. It's not all bad in the Valley since some submarkets are operating in the black, specifically far southwest Phoenix and Chandler, posting positive absorptions of 889,496 sf and 397,674 sf respectively.

New direct space is in a losing battle with sublease space because most building owners need "to achieve a certain rent because they paid top-of-the-market land prices," Klonoski says. Concessions have gone as high as 10 months free rent for a six- or seven-year lease and TIs for credit-worthy tenants are well above the norm of the $30 per sf cap. Some markets, he says, slashed rates by 10% from last year's highs. Consequently, lesser credit tenants are beginning to stack up as likely prospects for some building owners. It's an option to running the risk of protracted vacancy in a market where "very few good credit tenants are out looking for space," he says.