The ups and downs of Phoenix class A office space amid time of the novel coronavirus

Experts hesitant to say COVID-19 will kill brick-and-mortar staples

Posted 7/20/20

As Valley companies realize working from home is the foreseeable future, will that translate to a surplus of vacant class A office space?

Experts say: It’s too early to identify any changes …

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The ups and downs of Phoenix class A office space amid time of the novel coronavirus

Experts hesitant to say COVID-19 will kill brick-and-mortar staples

Posted

As Valley companies realize working from home is the foreseeable future, will that translate to a surplus of vacant class A office space?

Experts say: It’s too early to identify any changes that may be afoot as the long-term effect of the COVID-19 pandemic looms, but ultimately, for commercial leasing, the sky isn’t falling.

That’s not to say there won’t be changes.

The commercial vacancy rate is expected to go up over the next 12-24 months, and a shift in the need for large swaths of office space may occur as working from home becomes the wave of the future.

Further, as companies make decisions about their rent, the growth Maricopa County is continually experiencing plays into the amount of available office and retail space.

“People talk to me all the time --- they’re all talking about [how] commercial is going to crash,” Scottsdale commercial real estate expert Andrea Davis says.

“In Arizona, I don’t see it crashing and burning quick and fast, but there will definitely be an office re-set.”

From large corporations downsizing, to subleases and new emerging companies needing space --- changes will occur in the commercial real estate sector, experts say, but the impact remains a guess for now.

Chris Camacho, president and CEO of the Greater Phoenix Economic Council says there isn’t a definitive answer on the fate of Class A office space, but experts are seeing a number of converging trends yet to fully play out.

“We’re evaluating those on a quarter-by-quarter basis,” Mr. Camacho said.
“The major trends we’re seeing are the continuation of work-from-home, rapid tech expansion has been curbed, the national consolidation of business units into mega hubs is increasing, which Phoenix will be a winner, and what we’re calling ‘Nerve Centers.’”

Mr. Camacho says there is uncertainty in capital markets and equity funds that traditionally invest in commercial office buildings.

“They are taking a pause with a lot of class A capital backers waiting for this current situation to play out quarter by quarter,” Mr. Camacho said.

He also points to growing sublet space as companies re-evaluate their needs in the current environment. Mr. Camacho says available sublease space grew from 1.7 million square feet at the end of 2019, to 2.6 million square feet at the end of 2020’s second quarter.

“Through the first two quarters of 2020, absorption is 91,444 compared to 1.5 million through the first two quarters of 2019,” Mr. Camacho said. “Lastly, rental rates per square foot are holding steady now, but are expected to decline into the latter half of the year.”

Ms. Davis says when COVID-19 took hold, Arizona had very little vacancy for office, retail and industrial sectors, citing a 5-6% vacancy rate, which is much lower than the “healthy” vacancy rate of 10-12%.

Ms. Davis says the real impact of COVID-19 on office space won’t be known for one to two years.

“The big corporations that have a lot of litigious stuff they have to go through to bring their employees back, they are evaluating,” Ms. Davis said. “A lot of them are saying ‘we’re not going back to the office for a whole year’ or ‘we’re not making any decisions.’ So, but again, what does that mean to the real estate market?”

Ms. Davis says official speculations estimate office vacancy may grow to 17-20% within the next year.

“Still not crazy. In the downturn, the Great Recession, we were all the way up to 30%, so it’s perspectives,” Ms. Davis said.

Of the companies who occupy 50,000-100,000 square foot spaces --- which Ms. Davis says there aren’t a lot of in the Valley --- there will likely be a decrease in footprint.

“They’ll have to decide what they’re going to do with their real estate,” she said. “They probably will cut their footprints by half. So, you have 100,000-square foot spaces going down to 50,000-square feet --- so either they stay where they are or go and find a new location, so we will have a reset.”

A whether-or-not storm brewing

Ms. Davis says of either option, there will still be occupancy occurring.

“We are seeing more sublease space coming on the market, and that is kind of a good thing,” she pointed out.

Ms. Davis says in the past month, she has had two listings for subleases --- with one sublet being leased almost immediately to a growing cleaning company.

“We have companies that are expanding because of opportunities in the market and they need real space where they didn’t yesterday; we have companies that are looking to downsize,” she said.

Mr. Camacho agrees.

“The amount of space available has increased compared to the last quarter with 20.7 million square feet available. Historically, Greater Phoenix has generally shown positive rental rate growth year-over-year, but rental rates are moderating because of the effects of COVID-19,” he explained.

“Prior to the pandemic, retail was already facing an uncertain future due to shifting real estate trends such as significant number of retailers filing for bankruptcy, and the pandemic is accelerating some of those changes.”

Ms. Davis says the industrial leasing sector is “on fire!”

“I’ve got a lot of people from Chicago calling me, from Washington state, from California and Colorado --- wanting to relocate their business to Arizona --- oh, and Canada!” she proclaimed.

Being within the largest growing county in United States, Ms. Davis says she doesn’t see COVID-19 slowing down the mass exodus to Arizona.

“We still have tons of people moving here. Our real estate, the values for homes, haven’t been dented at all from all of the Realtors I’m talking to,” she said.

Mr. Camacho says the county growth data is typically reported annually, but GPEC fully anticipates Maricopa County to continue to grow.

“We’re still very bullish on the region’s job and population growth prospects as we emerge from COVID and the chips settle, especially with the transportation of workplace into a remote one,” Mr. Camacho pointed out.

“Recently, Phoenix was ranked the best U.S. city for remote workers and we expect a positive gain of high-skilled workers from high-cost markets like California and Seattle and in search of a better quality of life and affordability. Greater Phoenix is a great place to do business and has been, and despite the current downturn, we’re still seeing positive traction on the locate and expansion front, and our prospect pipeline is full. As people and workers rethink lifestyle, affordability and home life, the initial feedback we’re getting from portfolio companies and tech firms is that they’re betting on the future of Greater Phoenix because of the individual workforce conversation.”

Ms. Davis closes out by stating, while the conversation has been focused on available lease space the inventory to buy a work space is nearly non-existent.

“A lot of stats are for the rest of the country, and big metropolitan areas, but because we have newer buildings, and they’re not as high density, they’re easier to retrofit for up and coming different standards offices will want or employees will want --- I don’t see it as dooms day here,” she said.

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