Demand from technology tenants has driven office rents in Phoenix’s Tempe submarket up more than 15 percent over the past two years, according to CBRE’s annual Tech-30 report, which measures the tech industry’s impact on office rents in the 30 leading tech markets in the U.S. and Canada.
Average office asking rents in Tempe rose 15.8 percent to $29.81 annually from Q2 2016 to Q2 2018, the fifth most among the top tech submarkets from each of the 30 markets in the CBRE report.
Rent growth in Tempe has outpaced the broader Phoenix market, which saw rents increase 8.5 percent over the same period. Tempe also ranks fourth for net absorption among all submarkets, ahead of high-tech submarkets in San Francisco and Vancouver. The overall Phoenix market continues to strengthen as a top tech market because of growing competition among tenants to locate in talent-rich areas like Tempe, home to Arizona State University and a large, educated workforce.
While Tempe, South Scottsdale and Downtown Phoenix continue to remain tech users’ top choices in the Valley, some companies have started looking to nearby Chandler, where the availability of talent and affordable space have made this East Valley submarket an attractive alternative to South Scottsdale and Tempe.
Country-Wide Expansion of Large Tech Firms
Technology companies based in the top four tech headquarters markets—the San Francisco Bay Area, Seattle, Boston and New York—are expanding into new markets, creating more demand for office space and driving office rent growth in the beneficiary markets. Together, tech firms headquartered in these four markets have taken more than 25 million sq. ft. of space outside of their headquarters markets over the past five years, led by firms in the San Francisco Bay Area, which accounted for 18 of the 25 million sq. ft.
This trend is also occurring in Phoenix, where demand for tech space remains split between large Fortune 1000 companies expanding from other markets and small-to-medium-sized innovators. Firms from the top four tech headquarters markets have taken approximately 900,000 sq. ft. of space in Phoenix over the last five years.
“In Phoenix, there is still a preference for shorter lease terms as new-to-market companies prefer a ‘tiptoe’ approach into the market,” said Kevin Calihan, executive vice president with CBRE’s Phoenix office. “As firms become more comfortable with the long-term outlook for Phoenix’s office market, they commit to longer lease terms of five years or longer due to Phoenix’s affordability and access to talent, which continues to be a huge driver for tech firms looking to expand their operations outside of their base market.”
“As space availability in top tech submarkets continues to tighten, we expect large tech companies to continue to expand outside their headquarters markets—including further into secondary and even tertiary markets. Large tech company expansion into smaller markets will help foster innovation clusters, further boosting job creation and creating additional office demand,” said Colin Yasukochi, director of research and analysis for CBRE in the San Francisco Bay Area.