Downturn Will Be Tough for Phoenix

The oncoming downturn caused by COVID-19 will be tough for the Phoenix market, which has only recently started to blossom following the 2008 recession. However, conservative investment and development, along with job growth and population growth, will ensure that the region performs better in the current economic disruption than it did in the last crisis.

“This downdraft is going to be challenging for Phoenix. That said, I believe Phoenix will fare better than it did following the last recession because the local development community has taken a very thoughtful approach to building over the past few years,” Tiffany Winne, vice chairman and director of Savills, tells GlobeSt.com. “Today there are 2.4 million square feet of office space under construction, 48.2% of which is pre-leased, compared to Q4 2008 when 3.2 million square feet was under construction with only 14.0% pre-leased. 2008 was a much deeper hole to climb out of.”

Job growth has been a major aspect of Phoenix’s recovery; however, stay-at-home orders have catalyzed historic job loss across the country as well as in Phoenix. “There’s no reason to think Phoenix will be immune to the effects of the discouraging unemployment numbers we’ve seen across the country,” says Winne. “The Phoenix office market enjoyed 19 straight quarters of positive net absorption prior to now, but with deal flow near a standstill, that run is unlikely to continue.”

So far, the disruption has not resulted in any adjustment in lease rates or property values, but Winne says that an adjustment is coming. “I believe the landlord community in Phoenix has taken a wait-and-see approach so far on their pricing strategies,” says Winne. “Most have kept published asking rates where they were pre-COVID, but we think re-pricing is inevitable. We foresee landlords re-thinking their pricing strategies in the coming months, with some making aggressive moves downward in order to stand out.”

While lease rates have yet to fall, sublease space has flooded the market. The reasons for the increase in sublease space are various. It includes everything from an industry being impacted by the pandemic to companies that signed large leases during the growth phase and are now seeing a contraction. “Some large tech companies signed leases assuming huge expansions just prior to the onset of COVID-19 and then found themselves undergoing mass lay-offs,” says Winne. “Then there are some interesting cases where employers have seen productivity levels sustained, or even boosted, as employees stay at home. This data set, albeit limited, is compelling enough to some companies that they are willing to bet on it and shed some or all of their physical space.”

Lower quality assets are the most exposed to the impacts from the pandemic. “During a downdraft, we typically see tenants make a flight to quality,” says Winne. “This dynamic will insulate higher-end assets from some of the worst pricing cuts that will plague the class-B stratum.”