Phoenix Office Vacancy Hits 23.1% as Conversions Shrink Supply

A recovery driven by shrinking supply

Phoenix's office vacancy rate keeps falling, but the reason is not a wave of new tenants. Old buildings are being removed from the market. In July, Newmark's second-quarter report put metro vacancy at 23.4%. That was the third straight quarterly decline and 200 basis points below the year-earlier figure of 25.4%.13 The same report said leasing had slowed compared with the second quarter of 2025. Net absorption of 167,319 square feet came mostly from buildings leaving the inventory, and no new office projects broke ground.14

Newmark's third-quarter figures, released in October, continued the trend. Vacancy fell another 10 basis points to 23.1%, which is 250 basis points lower than a year earlier. Net absorption reached 282,261 square feet, the fourth positive quarter in a row.13 Newmark again said most of the improvement came from offices being taken out of inventory and redeveloped for other uses. It also reported asking rents up 3.3% from a year earlier.13

The main point is that Phoenix's office market is getting healthier by getting smaller. That is real progress, but it is not the same as a rebound in demand, and the difference matters for lenders, landlords and investors.

Where the numbers disagree

The brokerages agree on the direction but not on the size of the improvement. Kidder Mathews put total third-quarter vacancy at 23.7%. That is only 10 basis points lower than both the prior quarter and the year before, which looks more like a flat market than a recovery.11 Kidder also reported that leasing fell from a year earlier to about 1.29 million square feet, and that direct net absorption was only 23,620 square feet for the quarter.1118

Other firms measure differently. Colliers tracks direct vacancy, which it put at 14.5% in the first quarter. It reported 402,169 square feet of positive absorption in the second quarter and an inventory decline of more than 800,000 square feet in that quarter alone.830 CoStar data cited by a local brokerage showed vacancy at 15.7% in June, down from a 2024 peak of 17.1%. The same data showed about 1.5 million square feet of demolitions over the prior 12 months, which means net supply is now shrinking.9

The gaps come mostly from different definitions, building sets and treatment of sublease space, so the vacancy levels are not directly comparable. Every dataset does agree on one thing: inventory is falling and almost no new space is being built. Colliers said office construction was at an all-time low, with only two projects underway and both due to finish early in the third quarter.30

Kidder's breakdown by building class complicates the usual story that the best buildings are winning. It shows Class A vacancy at 28.3%, compared with 18.5% for Class B and 11.1% for Class C.11 Newmark measures a narrower trophy segment and found it much tighter, at 12.7% vacancy in the second quarter. It expects speculative construction could restart once that figure nears 10%.6 A reasonable reading is that demand is concentrated in a small group of top buildings, while the broader Class A category still holds a lot of empty space. The low Class C figure may partly reflect how many of the weakest older buildings have already been removed.

Removals at a record pace

The scale of removals is large by historical standards. Cushman & Wakefield found that 3.3 million square feet across 37 office buildings has been converted or demolished since 2024. That is more than the total for the previous ten years.722 Another 4.1 million square feet across 44 buildings has been proposed.22 From 2010 to 2023, conversion and demolition starts averaged about 254,000 square feet a year. They then reached about 961,000 square feet in 2024 and 2.2 million in 2025.22

The new uses are changing. Nearly three-quarters of the office space removed since 2010 became apartments or industrial buildings. Apartments' share of the proposed pipeline, however, has dropped from 35% historically to 28%.2223 Industrial now leads. Cushman found that all 19 proposed office-to-industrial projects are within a mile of a freeway interchange.22 Colliers reported that 88% of the 1.3 million square feet bought by redevelopers in the second quarter went to industrial developers.30 Colliers' midyear report also tied large vacancy drops in Tempe and Northwest Phoenix to vacant office campuses being torn down for industrial projects.25

Recent deals show the pattern. Panattoni bought State Farm's former regional headquarters in Tempe for $37.5 million and plans to replace about 462,000 square feet of offices with roughly 355,000 square feet of industrial space.29 Lincoln Property Company is tearing down a 220,000-square-foot office building to make way for a logistics campus. One developer said the easiest projects have already been done, so the pace may slow.23 Not every conversion is industrial. A 19-story downtown tower at the Arizona Center is set to become a 340-room JW Marriott.27 A $44.5 million loan will fund turning the former Freeport-McMoRan tower into a multi-tenant building.24

Data centers: a growing use with a backlash

Data centers are a small but notable part of the redevelopment pipeline. Cushman's list includes a four-building office complex on East Thistle Landing Drive, about 397,000 square feet, that began conversion to data center use in 2025. It also includes a 347,350-square-foot building on North 31st Avenue proposed for the same use.522 A construction listing describes a roughly $381 million Phoenix project that would demolish an office development and build several two-story data center buildings.21

The sector's demand is also raising land prices. GI Partners paid about $2.71 million per acre for a 5.43-acre data center site south of downtown, close to 4.7 times what the seller paid in 2012.24 Opposition is growing at the same time. Peoria is drafting stricter data center rules, and Glendale is reviewing a 160-acre campus that would include about 700 megawatts of gas turbines.24 Vintage Partners dropped a nearly finished data center campus in Laveen in favor of mixed-use development, after running into new rules and a revised process for connecting to the power grid.26 Bisnow has also reported that Arizona's attorney general has called for a pause on data centers.23

This matters for office owners because data center use has been one of the more valuable possible exits for an obsolete building. Tighter rules on power and zoning would make that option less available. More of the remaining conversion candidates would then have to work as industrial or housing projects, and those uses depend on land prices and building shape rather than access to power.

Debt is driving the next round of sales

Much of the redevelopment is being pushed by lenders, not chosen freely by owners. Newmark said higher borrowing costs and upcoming loan maturities are pressuring office owners. Investors are responding with discounted purchases, buildings bought by the companies that will occupy them, and adaptive reuse.3 Cushman counted 23 Phoenix office buildings, totaling 2.3 million square feet, that are older than 15 years, at least half available, and facing loan maturities in the next five years. It called them the likeliest conversion targets. It also noted that loan modifications and short-term extensions have so far kept distressed sales down.22

That delay may be ending. Nationally, the office delinquency rate on commercial mortgage-backed securities (CMBS) hit a record 12.34% in January, according to Trepp. Reports have described lenders as less willing to keep extending loans.3631 Trepp's office rate was 12.00% in August.37 It rose to 12.2% in September, the second-highest reading on record.33 CRED iQ, which includes loans that are past maturity but still paying, put office delinquency at 13.2% in August. It said 71% of distressed office balances were tied to failed or imminent refinancing rather than missed payments.35 About $39 billion of office CMBS comes due over the next 12 months.35

In Phoenix, that pressure shows up in prices. Average office sale prices are about 18% below their 2022 peak.22 Colliers reported office sales of $818 million in the first half of 2026, up 52.2% from a year earlier, and said office buildings are increasingly bought to be converted rather than leased.25 For real estate investment trusts and other institutional owners, the implication is that a building's land value may now set its price more than its rent income does.

Outlook

Cushman estimates that completing every proposed project would remove about 1.6 million square feet of vacant space and cut metro vacancy by roughly 110 basis points. It says that may understate the effect because some tenants have not yet moved out.22 The long-term case also rests on fundamentals outside the office market: steady population growth, scarce infill land and solid industrial demand. Cushman reported that Phoenix industrial vacancy fell 300 basis points from a year earlier to 10.3% in the third quarter.142

The falling vacancy rate is still mostly a result of shrinking supply. Office-sector hiring has picked up, and Kidder reported 1.3% year-over-year growth in office-using employment in July.18 Leasing volume, however, has not yet followed. Until it does, further vacancy declines in Phoenix will depend largely on how quickly lenders force sales, how many sites industrial developers want, and how much room local governments leave for data centers.