While 2001 brought an overbuilding of commercial and industrial properties due to demand, the next two years should see construction decline and vacancy rates drop, predicted R. Craig Coppola, founding principal of Lee & Associates Arizona.

North Scottsdale is one of the few submarkets to post to the positive in absorption, accruing 2.3 million sf since 1998 while its peers throughout the Valley drop. Valley-wide, there is more than two million sf of sublease space available.

Particularly hard hit has been the Camelback Corridor, which has had a negative absorption rate for the past two years. Most of the submarket's demand, Coppola noted, has gone to North Scottsdale. In the metro's Deer Valley section, 45% of the available space remains vacant. Even more dismal, he noted, is the absorption rate in the mid-town section of Phoenix, which hasn't seen positive absorption in more than four years.

"It is a cannibalistic marketplace," Coppola said of the city's mid-town. "This is a marketplace that's still going to be a tough one."

Yet while absorption rates remain mixed, Coppola said class A office space has seen an increase in leasing of 112% over the last 4 1/2 years. "There's a flight to quality," Coppola said, noting that tenants have taken advantage of competitive rental rates to upgrade their facilities.

While class A space will continue to be hot, he predicted difficult times ahead for class B and C owners as the market continues to exert a downward pressure on rental rates. Yet as construction slows over the next two years and jobs increase, Phoenix could enjoy a tighter real estate market than it has in the past.