By Mike Sunnucks | Rose Law Group Reporter
Net office leasing in the Phoenix metro area totaled 310,280 square feet during the first quarter, according to numbers from Lee & Associates Commercial Real Estate Services.
That absorption level is 28 percent of the 1,113,006 square feet leased during the first quarter of 2019. It is also down significantly from the 1,192,386 square feet leased during the fourth quarter of 2019.
Andrew Cheney, a principal with Lee & Associates, said the impacts of COVID-19 on commercial real estate and the economy are still playing out but the low absorption rate shows the early economic impacts of the pandemic.
Cheney said the office market could take two very distinct paths.
One is more positive than the other, Cheney writes in a new memo on the market and COVID-19’s impact.
Under Cheney’s less optimistic scenario: “Growing unemployment will send shock waves through the economy that cause most businesses to downsize, and many to fail.
Sublease space (lots of cool, new furnished space) could flood the market, increasing supply while demand continues to fall. Loans that cannot be modified will force buildings to go back to the bank and trade for severe price reductions,” he writes.
Cheney also has a more optimistic scenario for the market centered around the previously strong economic fundamentals in place before the Coronavirus hit. He also said social distancing could play a role in future office leases and workplace layouts.
“Because market fundamentals were so strong prior to COVID-19, supply may continue to decrease at a reasonable pace. Consider that there is 2.5 million SF of office product under construction. 51 percent of that figure is already leased, leaving just 1.26 million SF of new product to lease. As Q1’s stunted trends continue through the year, net absorption will reach 1.2 million SF for all of 2020; leaving vacancy hovering around 16 percent. (Speculative office development is on hold during this period of uncertainty.) Furthermore, companies focused on increased density will relax that figure to promote safe distances at work, and actually expand — especially in Arizona where the sun shines and there is plenty of space to enjoy it,” Cheney outlined.
The first quarter numbers put metro Phoenix’s office vacancy rate at 16.2 percent (compared to 16.1 percent in the fourth quarter) and asking office rents at $25.74 per foot (versus $25.16 in the fourth quarter).
COVID-19’s impact will be much more evident in second quarter data.
