As Phoenix Suburban Office Markets Recover, Skyline Poised to Follow

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“Game on” seems to be the sentiment of Phoenix office tenants as they continue to bounce back from the recession, albeit with smaller work spaces that must achieve greater efficiencies with a reduced footprint. Suburban office markets—primarily in Tempe, Chandler and the Camelback Corridor—that are close to employees and offer higher-density parking are leading this trend, according to JLL’s Spring 2014 U.S. Skyline Review.

“The Phoenix Skyline experienced the full force of the recession, and most of its tenant base shed jobs and reduced their real estate footprints in response,” said Dennis Desmond, Senior Managing Director in the Phoenix office of JLL. “But Phoenix jobs are returning, and with them a steady growth in occupancy that is tightening and pushing rental rates Valley-wide. Over the next several years, we expect this to have the same impact on the Downtown and Midtown Skyline submarkets.”

JLL’s proprietary Skyline report identifies and tracks micro-segments of 43 city centers across the nation. The Skyline features Trophy and Class A buildings where tenants and investors focus demand for office space in a flight to quality and efficiency. (Check out thethemes that shape the U.S. skyline.)

Though the direct vacancy rate for Phoenix’s Skyline still sits at 22.9 percent, sights are set on rapidly improving Skylines across the nation—where competition for office properties in 2013 propelled the national vacancy level to an average 13.4 percent.

“If you look at the JLL Skyline Clock, Phoenix sits squarely between the ‘Bottoming Phase’ and the ‘Rising Phase’,” said John Bonnell, Managing Director in the Phoenix office of JLL. “This is a perfect storm for tenants who appreciate the price differential, central location and amenities that Downtown and Midtown have to offer. It’s an opportunity that we remind our clients about constantly, and one that we expect to continue throughout 2014, since new construction is also very limited.”

In spite of tightening market fundamentals, construction activity in Skylines across the nation remains low. Seven U.S. Skylines—including Phoenix—show no current development. Two Skylines indicate just one proposed project.

”The lack of development is causing a space crunch on each end of the spectrum,” said John Sikaitis, Managing Director of Research at JLL. “Trophy properties are far outperforming the broader market with respect to occupancy levels and rents, and a similar tightening exists in value-add properties. This squeeze from both ends is expected to have a significant impact on the properties in the middle as tenants are being priced out of their former go-to options.”

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