There’s no space like Trophy space. The premiere office towers that make up Phoenix’s skyline boast—by far—the most expensive office space to rent, garnering asking rents that are 33.5 percent higher than non-Trophy space, according to JLL’s 2015 Digital Skyline. Average Phoenix Trophy rates in the first quarter of 2015 were $26.53 per square foot, compared to $19.87 per square foot in non-Trophy buildings. This gap between local Trophy and non-Trophy space is approaching peak historical spreads: 10 years ago, the difference was 37.6 percent.
“Owners of the Valley’s Trophy buildings recognize the leasing power of top-end amenities,” said JLL Managing Director John Bonnell. “As Phoenix’s economy improves, owners from The Esplanade to CityScape are taking the initiative to make sure those flight-to-quality amenities are in place, and that Trophy properties earn their position in the marketplace.”
According to JLL, the flight to quality in earlier recovery years coupled with an improving economy today have led to significant supply constraints in the country’s highest-quality office buildings. But while fundamentals are expected to tighten in many U.S. cities, drawing attention to other asset classes, the same may not be true for Phoenix. In contrast, the JLL report ranks Phoenix Trophy space as “neutral” for landlord versus tenant leverage through 2017.
This is, in part, because of the above-average vacancy in Phoenix’s Trophy product following the economic downturn – a trend that is leaving little difference between Trophy product (with a current vacancy rate of 24.5 percent) and non-Trophy assets (with a current vacancy rate of 21.3 percent.) As vacancies in Phoenix’s Trophy product persist, owners are being forced to slow their rental rate growth. Since 2012, local Trophy asking rents have increased only 1 percent, compared to 3.7 percent in non-Trophy product.
“Our economic momentum is shifting into full gear, but progress is still occurring at a very metered rate,” said Bonnell. “In Phoenix, there is a clear and positive expectation for Trophy office product in the long term, but the gap between our Trophy and non-Trophy rents may still widen in the near term.”
JLL’s proprietary 2015 Digital Skyline identifies and tracks micro-segments of 47 city centers across North America. The Skyline features Trophy and Class A buildings where tenants and investors alike focus demand for office space in a flight to quality and efficiency.