Arizona is in the midst of a stellar economic growth cycle, much of which is being driven by companies relocating to or expanding their footprint in the market. In 2018 alone, Greater Phoenix welcomed three new corporate headquarters and 42 businesses that opened offices in the market or expanded their current operation. According to numbers released by the Greater Phoenix Economic Council, the economic impact was $1.18 billion in capital investment and more than 8,600 new jobs.
All of these new companies require office space, and the property owners and brokers in the Phoenix market are learning what these companies desire in an office. While the most vital of these demands are universal, each company has their unique requirements and budgets.
“A focal point of most modern companies is attracting and retaining talent which means that they will typically be willing to pay more for locations, buildings, and suites that allow them to have a leg up in the war for talent,” said Danny Swancey, partner at ViaWest Group, which develops, purchases and manages office properties in the Western U.S. “On the other end of the spectrum, warehouse tenants with low-margin business that may be heavily automated might be more price-sensitive when it comes to their occupancy costs.”
So who are these new companies moving into the Valley and what unique demands do they bring with them? Over the past 10 years, Phoenix has seen a huge influx of financial tech and other high-tech related companies. Some of these companies have been drawn here by Arizona’s Regulatory Sandbox Program (RSP), which was created in March of 2018. Companies like Early Warning Services, LLC, the creator of Zelle online payment system, and Verdigris Holdings, have large workforces located in the Greater Phoenix market as a result of the RSP. This “FinTech Sandbox” allows financial services companies to test innovative products and technology in the market for up to 24 months without obtaining a license or other authorizations that might otherwise be required.
Along with financial technology, Phoenix is seeing a variety of technology-related companies set up shop in the market.
“With ASU as one of the top ranked engineering schools in the country, that has in turn drawn tech companies to the area for a high talent pool of new graduates,” said Alissa Franconi, associate principal, RSP Architects, and one of her firms’ top office interior designers. “This has caused other industries in the Valley to renovate or explore new workplace strategies to recruit and retain the top talent.”
In just more than a year, the Phoenix market has witnessed many high-tech companies set up roots in Arizona, including Airbotics, Creighton University, Deloitte, Nationwide Insurance, Nikola Motor Company, Oscar, Prenexus Health, Scheidt & Bachmann USA, Inc., Sends and Voya Financial, Inc. These companies will require space for just a few dozen employees to more than 1,000 employees like Voya Financial expects to hire in the next 5 years.
While new companies are coming into the market at a high rate, office brokers are seeing some drop off in certain, long-standing tenant classes.
“I’ve seen a consistent increase in nearly all sectors, but law firms and other professional service firms are shrinking,” said Bryan Taute, executive vice president for CBRE and NAIOP’s 2019 Office Broker of the Year winner. “They require less support and are providing more flexibility to work from home.”
The financial tech and high tech companies have similar office demands. They want Class A space with ample amenities and prefer the open office concept, but not too open.
“They are still cramming a lot of people in smaller spaces,” said Adrian Evarkiou, partner at The Boyer Company, which has developed office projects like Freedom Financial, Benchmark and Rio 2100 in Tempe. “They want open floor plans with not many offices, except for on the interior. They are looking for custom design, open office, more amenities expected in the park or building.”
“We are seeing an increased request for more amenities, both internal and external,” added Franconi. “From work cafes, walkable amenities to their office, pickleball courts, quiet library focus areas, more choice in how and where they work. The reason to create these amenities is to keep employees engaged with each other in the office environment.”
One of the ways that some companies are dealing with the move into the market is by utilizing co-working spaces. This allows them access to the kind of Class A spaces they want, but with flexible terms and the ability to expand or contract quickly.
“The biggest difference is often determining the best way to handle future growth or lack thereof,” said Swancey. “The unknowns of tenants in dynamic industries often make it challenging to predict head counts, configuration, and overall space needs. This is one of the reasons why flexible office, aka co-working solutions, can be a great stopgap for companies during seasons of their life cycle where there may be less predictably.”
For office brokers, these new tenants are looking for flexible lease terms, along with the aforementioned amenity filled buildings. Also, they are focused on locating in urban settings, if financially feasible. And if not located in an urban setting, an office that has an urban feel.
The current office products under construction reflect that desire for the urban work environment. Of the 1.6 million square feet of office space under construction in the first half of 2019, just under 1 million square feet of that is in the Tempe North (near Arizona State University and Tempe Town Lake) submarket. Projects like The Watermark, 777 Tower, I.D.E.A. Tempe, The Grand Phase 2 are best-in-class type products that will be leased up quickly. Downtown Phoenix is second on that list with 328,402 square feet of office space under construction, 200,000 square feet of that in one project, Block 23. Since 2016, Downtown Phoenix has leased more than 620,000 square feet of office space to tech companies as they are drawn to the Central Business District.
“Yes, some companies have recognized that the ‘cool clubhouse’ (new build in good buildings) is helping with employment retention,” said Evarkiou.
On other factors, there are some difference in opinions from office experts. Two of those are customization or tenant improvements, as well as open vs. drop-tile ceilings.
“Most prefer open ceilings, but noise concerns are causing more clouding or dropped ceilings in portions of the space,” said Taute. “Outside of professional services firms, almost all spaces are laying out very similarly. Tech company, insurance companies, financial services, etc. all tend to look very similar. Most users are not looking to customize.”
“Due to a more competitive talent pool, we are seeing an increase in office customization,” said Franconi. “Companies are using their space as a tool for recruitment and creating an experience as a potential candidate comes in for an interview.”
Other factors new tenants to the Valley must deal with are the rising asking rents in the market. Overall vacancy in the Phoenix market was 15.3% in the second quarter of 2019, according to the Q2 Office Market Report from Cushman & Wakefield. This was more than two percent below the historical five year average and was a major factor in pushing asking rents up to $26.25 per square foot. For Class A office product, the overall asking rent was $30.56. In the past, human resource staff was not heavily involved in the selection process for a new office but modern companies are seeing the value of having the HR point of view when deciding what kind of office space fits their workforce.
“Human resources definitely has more influence today than ever before,” said Taute. “It’s a combination of real estate, HR and finance. You need to appeal to all to have the most success.”
“There’s no doubt that more tenants are incorporating HR into real estate decisions,” echoed Swancey. “For larger companies, we often see committees comprised of HR, finance, facilities, and executive team personnel.”