Skyline is Back, Delivering Tenant Appeal and Investor Profits

Trophy assets still look to have some significant runway ahead.

PHOENIX—The office buildings that make up the Phoenix skyline have entered new territory in 2016, with rents and tenant demand achieving impressive gains during the last 12 to 24 months. And while JLL’s 2016 skyline report shows that rent growth across much of the nation may be peaking and moderating, Phoenix’s skyline and trophy assets still look to have some significant runway ahead. Phoenix’s skyline will continue to tighten as its downtown live-work-play environment evolves, but at present still lags behind comparable suburban high-rise assets. Skyline and trophy rents continue to rise, making areas such as Midtown an increasingly attractive alternative. High barriers to entry for skyline properties persist, with Phoenix owners confident about rent and value growth, says the report. “The Phoenix skyline is back, and is delivering dynamic environments for tenants and profitable returns for investors,” said JLL managing director John Bonnell . “While we’re nowhere near the extremes of markets such as Oakland, CA and Austin, TX–where skyline rents are up by more than 68 and 43%, respectively, since 2010 –we can celebrate tremendously healthy fundamentals that are encouraging skyline building renovations and attracting new companies across the tenant spectrum.” Phoenix’s skyline still has plenty of available space and has maintained its neutrality even as more space is leased, causing it to lag behind the few comparable high-rise buildings in suburban markets with a 20.8% vacancy rate. As the CBD continues to evolve as a hip live-work-play destination, new companies are expected to add to the skyline’s demand. Bonnell tells GlobeSt.com: “The rebound of the skyline sector is a good thing for the entire metro Phoenix office market. It adds depth to tenant options, encouraging a rich downtown environment for CBD-centric companies while also boosting interest in alternatives like Midtown, for companies whose operations might not exclusively hinge on having a skyline address.” The country’s fastest growing office markets are nearing a peak and tenants are feeling the pressure. In the short term, premium pricing for coveted skyline buildings will be exacerbated as new trophy buildings are delivered, forcing some tenants to look to lower cost options or different markets altogether, says JLL. Skyline rates in Downtown Phoenix are well above the market average of $23.75 as the submarket gains traction with tech companies. For tenants looking for lower rates, Midtown buildings offer an affordable alternative to trophy space, while still delivering ample amenities and accessibility via public transit. Tenants looking for the most coveted trophy spaces will continue to feel pressure of dwindling large available blocks of space and premium pricing, with trophy rates averaging $28.29 per square foot, says JLL. Though the economy is on steady ground and expected to remain stable during the next 18 to 24 months, it’s the broader global economy that continues to weigh on the minds of investors. Combined with the concern about the trajectory of the technology industry in real estate expansion, investors have reason to give pause. Investors in the Phoenix market, however, have benefitted from tech demand, which has grown more slowly–but also more consistently–than other comparable markets. In that process, Downtown Phoenix has emerged as a viable alternative to Phoenix’s traditional tech markets in Tempe and Scottsdale, AZ, encouraging investors to act and improve upon current skyline assets. High barriers to entry in primary markets, resulting from cost and competition, may make skyline assets harder to acquire. A combination of peak pricing and scarce investment opportunities could encourage migration, leading investors to hot secondary markets where rent growth is still achievable and tenant demand persists, according to the report. In Phoenix, there are currently several investment opportunities within the skyline, as the downtown area continues to reinvent itself. With an increase in multifamily, retail and cultural growth surrounding the skyline, investors are confident that these buildings will achieve rent growth as demand continues to grow. Despite the rise in popularity of older creative buildings and fringe markets, skyline assets still have lasting power. Owners must keep pace with the changing times to remain competitive, particularly in skyline buildings with below-average occupancy. By investing in common areas, building systems and office space, owners can turn lackluster buildings into a substantial payoff. Skyline properties are also feeling pressure from newly renovated warehouse space and historic buildings emerging in Downtown Phoenix, and these newly competitive properties have encouraged owners to invest in skyline assets. Owners are also well aware of the emerging tech demand, and have improved retail, common areas and collaborative spaces to attract new-to-market companies.