Creative boomerangs back to Phoenix skyline

When it comes to premium office space across the United States and Canada, creative firms are doing what they do best: driving change. JLL’s 2017 Skyline shows that creative’s boomerang to this coveted space and the eighth straight year of occupancy growth are contributing to record rents and a landlord-friendly market. In Phoenix, the 24/7 environment of downtown Phoenix is attracting creative and tech tenants in droves, even from prominent first-tier markets like San Francisco and Chicago.

 

Skyline is JLL’s annual look at office space within some of the tallest buildings in 57 markets across North America. Some highlights from this year’s edition include:

  • At 21.0 percent, Skyline vacancy within metro Phoenix still runs notably higher than the national average of 12.9 percent, but that high vacancy rate comes with a major advantage: Phoenix still has lots of time left in its upcycle.
  • Nationally, Skyline rents hit a record $44.55 per square foot. In Phoenix, they sit at $25.86 per-square-foot, representing a 4.1 percent year-over-year increase, though it’s not necessarily demand driving rents in our market…
  • Attracted by our office market runway, buyers continue to seek out the Phoenix Skyline. Between 2015 and 2016, local Skyline sales increased 30.7 percent. This includes trade of Renaissance Square from Hines Securities to Cypress Office Properties for $150.0 million, and the trade of 3200 N. Central from EverWest Real Estate Partners to Bridge Investment Group Partners for $49.0 million.
  • On a national level, the Skyline construction pipeline is healthy, but building activity is starting to slow. Phoenix, in contrast, is a market on the rise, with a construction pipeline that is starting to flourish.

“The tenants of today are looking for more than quality office space. They want walkable amenities in live, work, play environments that enable them to attract and retain caliber talent. Developers have recognized this and are building or renovating to meet those demands, said JLL Managing Director John Bonnell. “The resurgence of Downtown, with an abundance of new retail and multifamily development, is attracting a variety of companies including technology ones that had previously been focused on finding creative/collaborative space in only Downtown Tempe or South Scottsdale. The day-and-night environments of those submarkets has been hard to duplicate, but Downtown is quickly evolving into that environment.”

 

Landlords on top, for now

Nationally, the net change in occupied space, also called net absorption, jumped to 8.3 million square feet – more than five times what it was a year ago. However, we expect eight straight years of national Skyline occupancy growth to ease soon as the market prepares for several large blocks of space to become available. Over the past year, Skyline absorption in Phoenix has been less than stellar as out-of-date buildings struggled to attract contemporary tenants. However, money spent on new development and renovations within Phoenix’s Skyline properties has changed that, creating hip, collaborative office space and a renewed 24/7 environment. These modernized buildings have generated a new wave of interest from tenants within and outside of the metro Phoenix market, creating a very positive outlook for absorption for years to come.

 

A rising tide lifts all boats

Tenants still want that Skyline caché, a fact proven by rents. New York stands above all others with an average Skyline rent of $87.90. Nashville hit a high note with the biggest year-over-year rent growth of +27.4 percent. In Phoenix, rents jumped to an average $25.86 per-square-foot, though it’s not necessarily demand driving rents in our market. Rather, investors are renovating and modernizing to secure higher returns. A renovation at Renaissance Square pushed rents up 17.2 percent, from $29.00 per-square-foot in 2016 to $34.00 per-square-foot today. Arizona Center has increased similarly, by 12.3 percent to $29.75 per-square-foot. The highest Skyline rents in metro Phoenix sit at $38.50 per-square-foot at Block 23 at CityScape, and $38.00 per-square-foot at CityScape.

 

Buyers selectively target the Skyline

As noted previously, buyers are still very interested in Phoenix Skyline properties that have been renovated or have the opportunity to deliver upside through repositioning. “Skyline assets continue to provide stable value, making them an incredibly attractive option for investors,” said Jonathan Geanakos, President, Americas JLL Capital Markets. “We’ve also seen a large increase in foreign investment into some of the trophy properties included in our Skyline portfolio over the last year and the beginning of this year. In addition, both foreign and domestic investors are finding secondary market real estate to be more readily available and at a relative discount.”

 

Getting quieter on the construction front

With the national Skyline construction pipeline extending all the way into 2021—15 million square feet is set to deliver in 2018 alone – and the potential for slower economic growth and a tightening in construction lending, we expect the Skyline to shift to neutral territory for landlords and tenants in most major markets. Phoenix may be a bit of an exception. Construction activity within the Warehouse District is robust. There is also 220,000 square feet of new space at Block 23 at CityScape scheduled to begin construction in 2017.

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