The Phoenix commercial real estate market saw a year-over-year decrease in leasing activity in the third quarter of 2026 and is down to 1.29 million square feet. The sales volume in the quarter was $470,000, and the total vacancy rate decreased 10 basis points year-over-year.

Market drivers

The Phoenix office market recorded 23,600 square feet of positive direct net absorption in the third quarter of 2026.

Central Corridor recorded the highest positive net absorption at 105,600 square feet, while East Phoenix saw the lowest, with negative net absorption of 64,600 square feet. Class A recorded a direct net absorption of 48,820 square feet and Class C posted 14,036 square feet, both positive for the quarter, while Class B posted negative 39,236 square feet.

Sublet demand remained strong, with Class A sublet absorption totaling 40,300 square feet, accounting for just under half of total Class A net absorption of 89,200 square feet.

Total leasing activity totaled 1.3 million square feet in the third quarter of 2026, down from the prior quarter.

Average direct rates held at $31.66/square feet full service gross, representing a 2% increase year-over-year. Total vacancy stood at 23.7% in the third quarter, down just 10 basis points from both last quarter and the same period last year.

Class A total vacancy stood at 28.3%, Class B at 18.5%, and Class C at 11.1%, with all three class types remaining relatively consistent with the prior quarter. Class A rates continue to lead average direct rental rates at $34.50/square feet full service gross, reflecting the premium associated with Class A office product.

Near-term outlook

The Phoenix office market is continuing to move toward stabilization, with office-using employment increasing 1.3% year over year in July, the strongest annual growth since mid-2022. As employment grows, developers are taking a more selective approach to new office investment, with greater emphasis on renovating and repositioning existing properties.

Limited new office development and the potential removal or repositioning of older, underperforming buildings could gradually reduce available inventory. As available space becomes more limited, competition is likely to increase for well-located, updated properties, particularly those offering modern amenities and flexible space. Properties that can adapt to evolving tenant needs are likely to remain better positioned to attract and retain demand, while older commodity space may continue to face a slower recovery.

Editor's note: The above was republished from a Kidder Mathews news release.