Economy: Phoenix Economy Continues to Expand
In Q3 2026, the Phoenix Metro reported an employment level of 2.5 million, after adding 24,000 jobs over the last year. While the unemployment rate ticked up from 3.9% to 4.4% during that timeframe—and exceeded the national average of 4.2%—the increase was largely attributed to expanded labor force participation, rather than job losses. A key driver of this trend has been the Metro’s strong wage growth, with the median household income rising by 4.6% year-over-year (YOY) to $98,500. Phoenix’s population also grew at four times the rate of the national average, however, the 0.8% YOY increase marked a slowdown from previous quarters. Annual GDP growth, meanwhile, accelerated up from 2.4% in Q3 2025 to 2.7% in Q3 2026, underscoring the Metro’s positive economic momentum.
Demand: Overall Vacancy Holds Steady in Q3
Office vacancy in Phoenix settled at 25.1% in Q3 2026, remaining flat from the prior quarter amid moderately positive net absorption and no new speculative supply additions. During the quarter, the Class B sector noted a 50 basis point (bps) decrease to 25.1%, while Class A spaces registered a 10 bps uptick to 27.0%. Despite this apparent divergence, a clear flight-to-quality appears to be taking place in the market, with vacancy among Metro’s 32 premier Class A buildings compressing by 120 bps quarter-over-quarter (QOQ) to 12.3%. Meanwhile, Class C vacancy grew by 100 bps QOQ to an 11-year high of 20.1%. Across all quality tiers, the submarkets that recorded the greatest vacancy declines during the quarter included Piestewa Peak (100 bps to 25.3%), South Scottsdale (90 bps to 21.9%) and Price/Chandler/Gilbert (70 bps to 24.4%).
Demand: Leasing Slows, But Not Without Pockets of Strength
Leasing activity totaled 1.3 million square feet (msf) in Q3 2026, down 14.6% from Q2. Despite the slowdown, several submarkets still exhibited standout performances. In particular, the North Airport-44th Street Corridor posted an eight-year high of 140,650 sf during Q3, while Downtown’s 94,788 sf of new leasing marked its strongest quarter in five years. Meanwhile, the Camelback Corridor submarket led the overall Metro with 246,594 sf of activity, accounting for nearly one-fifth of the market-wide total in Q3. Among asset classes, Class A demand has remained the most stable. The sector recorded 584,688 sf of new leasing in Q3, slightly exceeding its trailing three-year average (581,285 sf). Class B leasing, on the other hand, fell to a multi-year low of 569,603 sf during the quarter.
Demand: Absorption Trends Show Market Recovery is Underway
Office net absorption reached 100,295 sf in Q3 2026, lifting the trailing 12-month total to a post-pandemic high of 1.7 msf. This also marked the fourth consecutive quarter of positive absorption, with the Metro achieving this feat for the first time since 2019. Momentum was widespread, with 15 of the Metro’s 24 submarkets recording positive trends, up from just seven submarkets at the start of 2026. The submarkets posting the strongest net absorption during Q3 were Price/Chandler/Gilbert (83,501 sf)—which has now led the overall Metro for two quarters in a row—Desert Ridge/Paradise Valley (78,685 sf) and Tempe (53,054 sf). Market-wide, Class B properties posted 151,834 sf of absorption, the highest among property tiers, while the Class A sector’s 69,831 sf extended its streak of positive absorption to seven consecutive quarters. Looking ahead, net absorption is expected to strengthen in Q4, supported by nearly 1.1 msf of signed deals that are slated to commence.
Supply: Sublease Vacancy Continues On Downward Path
In Q3 2026, Phoenix’s total volume of vacant sublease space declined for the 11th consecutive quarter and fell to a five-year low of 2.7 msf. While this level is still well above the 2014-2019 average of 697,268 sf, it represents a 49% reduction from the 2023 peak of 5.2 msf. Strong demand for sublease space has primarily driven this trend, with average quarterly absorption totaling 228,427 sf since 2024. In Q3 2026 alone, six subleases over 10,000 sf were signed, contributing to 180,436 sf of total sublease activity and accounting for 14% of all new leasing across the market.
Pricing: Class B and C Properties Drive Overall Rents Up
The Metro’s average full-service gross asking rent rose 0.5% QOQ, reaching a new all-time high of $30.68 per square foot (psf) in Q3 2026. Class B and C properties primarily drove this growth, recording gains of 1.6% (to $29.14 psf) and 1.8% (to $21.93 psf), respectively. While the average Class A rent only increased 0.2% to $36.60 psf, it’s likely that the true growth was understated, as several landlords of premier top-tier offices are continuing to withhold asking rates to gauge the speed of the market’s recovery. Overall, the submarkets noting the greatest gains during Q3 were Superstition Corridor (4.1%), Piestewa Peak (4.0%) and Deer Valley (2.6%).
Emerging Trend: Large Offices Observe Positive Vacancy Trend
Vacancy among offices 100,000 sf and larger fell 30 bps quarter-over-quarter (QOQ) to 28.7% in Q3, its lowest level in nearly three years. While vacancy in this segment remained well above the 18.0% rate recorded by buildings under 100,000 sf, larger properties are attracting significantly stronger tenant demand. In Q3, buildings below 100,000 sf recorded 143,206 sf of negative absorption, while larger buildings posted 243,494 sf of positive absorption. This dynamic likely reflects an ongoing flight to quality, as tenants increasingly gravitate toward larger Class A and B+ properties.
