OFFICE MARKET TRENDS The Phoenix office market continued to find its footing through 2024. Leasing activity grew 7% year-over-year and exceeded pre-pandemic levels. Stabilizing vacancy rates and steady rent growth indicated a potential shift towards recovery. Tempe saw a slower recovery than other submarkets as tenants prioritized the CBD and Camelback Corridor in recent quarters. Tempe has generally seen a slower leasing recovery over the past two years as its dominant industry, technology, has been more defensive. Total office inventory in the Phoenix market declined for the fifth consecutive quarter, contributing further to a decrease in the total vacancy rate, but a concentration of recent development activity around Tempe has driven local vacancy rates to near 30%, though they are beginning to plateau. Approximately 502,000 s.f. of office space was under construction as of year-end 2024, mostly build-to-suit development, and all properties were fully pre-leased. Direct asking rent growth highlighted ongoing market optimism, increasing by 3.1% year-over-year. Demand remained concentrated in amenity-rich spaces, particularly in Tempe and Camelback Corridor. The Downtown submarket, greatly impacted during the pandemic, had positive net PHOENIX (TEMPE) • Negative net absorption fell by 85% YoY as occupancy losses stabilized considerably over the course of the year. Vacancy rates have plateaued in the broader metro but increased slightly in Tempe amid construction deliveries. • Total office inventory declined for the fifth consecutive quarter, with elevated conversion activity and less construction compared with historical levels. • Quarterly net absorption was slightly positive but nearly neutral, with total net absorption of 8,700 s.f. This was the first quarter of positive net absorption since Q3 2021. • Direct asking rent growth, which increased by 3.1% year-over-year, highlighted ongoing optimism. absorption and signs of returning interest in 2024. However, struggles persisted in some large submarkets, such as Midtown and the Airport Area. OUTLOOK The Phoenix office market is set for gradual improvement in 2025, with stabilizing vacancy rates and steady rent growth indicating cautious optimism. Many businesses have likely finalized future space adjustments, reducing occupancy volatility, as leases signed before the pandemic have mostly expired. Additionally, the ongoing conversion of obsolete buildings and limited new construction should help limit market weakness. However, a lack of new supply may reduce suitable options for companies looking to relocate or expand. With 31 million s.f. of expiring leases in the next three years and 4.8 million s.f. available in the pipeline or recent developments, Phoenix will likely experience lower renewal rates than the U.S. average in the coming years. MUST'S SUBMARKETS Overall market statistics Forecast 2024 net absorption (s.f.) -1,305,021 Under construction (s.f.) 502,177 Total vacancy (%) 24.9% Sublease vacancy (s.f.) 4,851,007 Asking rent ($ p.s.f.) $30.82 Concessions Stable Net absorption and overall vacancy rates Gross leasing activity Rental rates and going-in yields Class A cap rate (%) Cap rate Asking rent 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 8% 7% 6% 5% 4% 30% 25% 20% 15% 10% 5% 0% $45 $40 $35 $30 $25 $20 2010 2014 2018 2012 2016 2020 2022 2024 Net absorption (m.s.f.) Total vacancy (%) Tempe Rest of Phoenix 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 6.1M 5.2M 5.6M 6.4M 7.4M 3.8M 4.1M 4.4M 5.1M 5.4M 0.6M 0.7M 1.4M 1.0M 1.5M 0.9M 0.7M 0.8M 1.1M 1.1M 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 INDEPENDENT MARKET REPORT By JLL as at 31 December 2024 48 | MANULIFE US REIT
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