Rent growth could extend into 2021; surpass previous peak
PHOENIX, Arizona – Even with more than 1.1 million-square-feet of new space delivered in the first quarter of the year, average asking rents for Phoenix office product has increased to the highest level in nine years, according to the Q1 2017 Phoenix Office Insight report released this week by the Phoenix office of JLL. Reaching $24.91 per-square-foot, today’s Phoenix office rent average is just 7.1 percent lower than the pre-recession high of $26.82, set in Q4 2007.
Total vacancy remains relatively unchanged – and still under 20 percent – as new construction just slightly outpaces demand, and with more than half of all new space delivered in Q1 2017 representing preleased product, primarily at the Marina Heights/State Farm development in downtown Tempe.
“Since 1990, there have been three significant cycles that have dramatically impacted the Phoenix economy and its office rents, and each cycle contained a period of peak and trough rental rates,” said JLL Senior Managing Director Dennis Desmond. “This creates some level of predictability, and – as predicted – history is repeating itself.”
According to historic data, Phoenix experienced peak/trough years (respectively) in 1990/1993, 2001/2004 and 2007/2012, with each cycle reaching a higher rental rate than the cycle before. With today’s average Phoenix office rents significantly higher than the most recent trough rate – yet still below the previous peak – Desmond notes that investors could enjoy a runway of rent growth that extends to 2021, and reaches as high as the mid-$27 per-square-foot range. This would surpass the previous peak of $26.82 reached in 2007.
“Generally speaking, an investor who considers past performance as an indicator of future performance could buy a Phoenix office building in 2017 and have reasonable expectations that the income his investment generates will continue to increase for four more years,” he says. “This is particularly true for the submarket leaders highlighted in the Q1 office report. As rents in these submarkets rise, they will pull other submarket rents up along with them.”
According to JLL’s Q1 2017 Phoenix Office Report, submarkets with the highest current Class A office rents are Camelback Corridor (at $34.51 per-square-foot), Tempe (at $34.10 per-square-foot), downtown Phoenix (at $32.02 per-square-foot) and South Scottsdale (at $31.89 per-square-foot).