Phoenix Office Market’s Small Wins Add Up

On par with ongoing national trends, the Phoenix office sector’s construction activity slowed this year, with developers breaking ground on only nine projects, according to CommercialEdge data. The metro’s under-construction pipeline was one of the smallest among major U.S. metros as of the end of October.

However, the Valley of the Sun remained one of the top 10 best-performing markets for investment in the office sector. Meanwhile, coworking space in Phoenix was on par with the national figure, while conversion of office space into residential is a growing option to deal with the sector’s woes.

Development activity trails peer markets

As of October, Phoenix had 555,850 square feet of office space under construction, accounting for 0.4 percent of existing stock—below the national figure of 0.9 percent. When factoring in projects in the prospective and planning stages, the rate reached 1.9 percent of existing stock—still below the national rate of 3.2 percent.

The metro is still struggling with office supply and had one of the smallest pipelines among high-volume secondary markets. Austin led, with 3.5 million square feet underway, followed by San Diego (3.1 million square feet), Dallas (3 million square feet), Nashville (2.1 million square feet) and the Bay Area (1.8 million square feet). Markets with smaller pipelines were Detroit (524,000 square feet) and the Twin Cities (435,666 square feet).

The largest project currently under construction remains SunCap Property Group’s Gilbert Spectrum’s Building 3, a 119,222-square-foot office building that broke ground in July 2023. Its completion date was pushed to the end of the year.

Another notable office development is HonorHealth Medical Campus at Peoria, a 100,000-square-foot health-care facility. Developed by Anchor Health Properties, HonorHealth and SMIL, the project topped out in April this year is expected to come online in early 2025.

Construction starts totaled 561,845 square feet across nine properties year-to-date through October, while developers delivered 646,629 square feet in 10 properties.

One project that came online in 2024 is Levine Investments’ office campus at 8240 S. River Parkway in Tempe, Ariz., totaling 135,000 square feet. The property is part of Arizona State University’s Research Park.

Office-to-residential conversion an option for Phoenix

While the office landscape struggles with rising vacancy rates and owners are offloading properties, office-to-residential conversions pose an increasingly attractive option. A new tool developed by CommercialEdge, the Conversion Feasibility Index, evaluates and lists the potential of office properties for residential makeovers, based on building features and property-level scores.

There are currently 41 office properties in metro Phoenix with a score between 75 and 100, placing them as Tier I and II candidates for future residential redevelopment. Of the total, 35 are in Phoenix, while the Mesa and Scottsdale submarkets each have three candidates.

Transaction activity increased year-over-year

Year-to-date through October, Phoenix office properties traded for a total of $1 billion, comprising 7.2 million square feet across 82 assets. The total deal volume increased by 18.5 percent on a year-over-year basis. The metro placed eighth among the best-performing markets, with Manhattan leading with $3.3 billion. Across Sun Belt metros, the Bay Area led with $2.1 billion and was followed by Dallas ($1.1 billion), while Phoenix outperformed Austin ($881 million).

One of the biggest transactions closed in the metro is the $97.9 million sale of 24th at Camelback II, a 302,209-square-foot Class A building. Hines sold the 11-story property at the end of October to Wide Open Excursions in one of the largest office deals since 2022.

The second largest office transaction was the sale of 24th at Camelback I, an asset with the same square footage. The 2000-completed building changed hands from New York Real Estate Investors to Columbus Properties in a $86.1 million deal.

The average sale price for office properties in Phoenix was $164 per square foot—below the national figure of $177 per square foot. Among similar markets, deals were pricier in the Valley when compared to Dallas ($130 per square foot) and Houston ($104 per square foot).

Phoenix office vacancy rate below the national figure

As of October, Phoenix’s office vacancy rate reached 18.4 percent, down 60 basis points over a 12-month period and below the national rate of 19.4 percent. The index was one of the lowest among similar markets, such as Austin (27.7 percent), the Bay Area (26.4 percent), Houston (24.3 percent) and Dallas (23 percent).

Earlier this year, Stream Realty Partners became exclusive leasing broker for the redevelopment of a 410,000-square-foot, two-building office campus in Scottsdale, Ariz. INISIO at Kierland, owned by Vero Capital’s investment platform, Vero A2R, is undergoing a $29 million renovation, with completion expected by the end of the year.

An expansion in the coworking sector

As of October, coworking spaces in Phoenix totaled 2.8 million square feet, more than in the Bay Area (2.6 million square feet) and Austin (1.7 million square feet). Manhattan led all rankings with 11.2 million square feet. The share of flex office space as percentage of total leasable office space reached 1.9 percent, on par with the national figure, but higher than Austin’s (1.7 percent) and the Bay Area’s (1.2 percent).

Providers with the largest footprints in the metro remained unchanged—Regus led with 567,688 square feet, followed by Expansive (207,095 square feet), Industrious (201,712 square feet), Spaces (171,460 square feet) and Bellagio Executive Plaza (140,393 square feet).