While Arizona and technology may not be obvious bedfellows, the data has been tabulated and the results are in: tech in the desert is hot. According to JLL’s U.S. Technology Outlook, Phoenix has opened up a lot of potential investment opportunities as it has become a magnet to tech entities, thanks to its lower cost of doing business, including average office rents of $23.94 per-square-foot (PSF), and its educated workforce, with 29 percent of the population holding a bachelor’s degree or higher.
“Companies coming from markets like Silicon Valley, Seattle and San Francisco are accustomed to office rental rates that can exceed $100 PSF,” said JLL Senior Vice President Keith Lammersen. “In Phoenix, they find a sophisticated market with a highly skilled workforce, a great quality of life and a very modern office inventory, with rents that are extremely affordable compared to their home markets.”
The market is the perfect incubator for tech companies that are headquartered on the West Coast but need cost-effective site selection alternatives for their high-employee-count business functions such as customer success and secondary operations centers. In these cases, Phoenix offers a comparatively lower cost of real estate that, in addition to lower rents, offers benefits like higher parking ratios, which is key for many service- and support-related tech operations.
Phoenix’s close proximity to heavy-hitting Western tech markets also offers a geographic advantage, putting the Valley within a short plane ride of most headquarters. And with growing local transportation amenities like Phoenix’s Light Rail, travelers can get from Sky Harbor International Airport to tech darlings like downtown Tempe in less than 10 minutes.
“Some of our most significant new tech commitments have come from software-related companies like Zenefits, Weebly, Oscar Health, LearnVest and ZocDoc establishing support operations here,” said JLL Executive Vice President Ryan Bartos. “But interest extends beyond software entities. We have really become a mecca for the high-employee-count tech divisions of all types of verticals, from insurance to finance to health care.”
Tempe and Scottsdale are among the market’s well-known tech hubs, with increased interest leading to a rise in rental rates. Lammersen cites Galleria Corporate Center as an example, noting that tech tenant activity has increased asking rents at the Old Town Scottsdale office project by 81 percent in just five years –to $38.00 PSF today. A similar trend is happening at Hayden Ferry Lakeside in downtown Tempe, where tech activity boosted rents in Phase I and Phase II from $28.00 and $29.00 p.s.f., respectively, in 2011 to $45.00 p.s.f. today.
But emerging markets like downtown Phoenix’s Warehouse District are gaining momentum and providing investors additional options to secure yield. “We have a flexibility in our tech office product that is impressive,” says Bartos. “Downtown Tempe, Old Town Scottsdale and Downtown Phoenix deliver an established, Class A live, work, play environment that millennials flock to, but inventory is tightening and rents have ramped up to $40 per-square-foot or higher for premier space.”
With the Warehouse District’s quickly amassing inventory, this area of downtown Phoenix is introducing creative tech space at a fraction of the cost of Phoenix’s top tech locations – and attracting investors. “If there is opportunity to create value by turning obsolete space into modern, creative office product, you’ll have investor interest,” said Bartos. “These opportunities are typically infill, and are extremely sought after in the tech world as compared to traditional office buildings.”
Bartos cites The Circuit as an example – a 1980s-built semiconductor building in Tempe that was converted last year by EverWest Real Estate Partners into an ultra-modern, 185,000-square-foot, high-density creative office project. In May, New York-based health insurance company Oscar announced it would relocate its Oscar Concierge team into half of the newly repositioned project.
“We have two of the country’s largest universities in Arizona, graduating thousands of students each year,” says Lammersen. “A significant percentage of these graduates want to stay in the state and they are clamoring for well-paying tech jobs like those being offered at these new projects.