By Mark Carlisle
The metro Phoenix area, led by Tempe, has become one of the fastest-growing tech markets by office space rented in the U.S., according to a report.
CBRE’s 2018 Tech-30 report, which measures the 30 top tech markets in North America, ranks Phoenix as having the country’s sixth largest growth rate over the past two years in tech office net absorption, the rate at which tech companies entered the market against those that left. Tempe, which leads the Phoenix area’s tech industry, ranked fourth in net absorption among tech submarkets.
“Now as we become more urban, I think we’re just appealing to a different type of workforce,” said Maria Laughner, economic development program manager for the city of Tempe. “A worker that’s interested in taking light rail or biking to work, for example. We’re very lucky to have ASU (Arizona State University) in our backyard, so building off of them. The kind of environment that we have here, you just can’t replicate everywhere.”
The expansion of metro Phoenix’s tech offices follows its explosion in tech job growth in a few years ago. In 2016 and 2017, Phoenix ranked just 15th among the top 27 U.S. tech markets with a 10.9 percent increase in high-tech jobs. But during the prior two-year period in 2014 and 2015, Phoenix ranked second with a 36.3 percent increase, trailing only San Francisco.
Metro Phoenix now employs 57,311 workers in high-tech software and services, according to CBRE, the 12th most of any U.S. market. That number of workers has more than doubled in the past 15 years and Phoenix has added 5,651 tech jobs in the last two years.
“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 in a written statement. CBRE is the largest commercial real estate services and investment firm.
Phoenix remains a relatively inexpensive place to rent a tech office, with an average price per square foot of $25.61, ranking 20th among the 27 top U.S. tech markets. That rate is less than half the rate in Silicon Valley and just over one-third of the rate in the New York and San Francisco.
Tempe is getting slightly more expensive for tech companies. It had the fifth largest jump in rent rate among tech submarkets over the last two years, increasing 15.8 percent to $29.81. Tempe also has less remaining room than the rest of the Valley, with a 4.8 percent vacancy office vacancy rate compared to a 16.2 percent vacancy rate across metro Phoenix, according to CBRE.
The Phoenix area has 1.9 million square feet of sublease and 2.9 million square feet of office space under construction. Some companies have looked also to Chandler due to limits in Tempe and South Scottsdale for both space and talent.
Ms. Laughner said Tempe’s workforce talent is one the top thing that draws tech companies to the city.
“We have in our backyard, ASU and University of Advanced Technologies. So, we have access to a new workforce with graduates that are skilled in technology,” she said. “…We have definitely had a focus, an economic development strategy to attract high-tech companies, but that’s because of our assets.”
Tech companies are also aware of the workforce pipeline from ASU and UAT, she said, and often inquire about space in Tempe on their own. More than 42 percent of Tempe residents have at least a bachelor’s degree, compared to 30.8 percent in metro Phoenix.
Tech companies with offices in Tempe include Limelight Networks, LifeLock, Insight Enterprises, Honeywell, Microchip Technology Inc., TTEC, Becton Dickinson, Medtronic, Zubra, Neudesic, Ziprecruiter and Amazon.
The companies’ presence have had an effect on the culture of Tempe, Ms. Laughner said.
“I think it has had an impact,” she said. “We are a little bit of a more progressive city. There’s a really strong sense of community. We have a younger community also… I think we are what people would imagine the (San Francisco) Bay Area to be, on a very small scale obviously.”
One of the largest snags to Phoenix’s tech industry has been the hesitancy of some companies to sign long-term leases.
“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 in a written statement. “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.”
Ms. Laughner said that while most leases don’t come to her office’s attention, she is working with several companies looking at 10-year leases or buying buildings.
The five U.S. markets that topped Phoenix in net absorption growth rate over the last two years are Salt Lake City, Utah; Raleigh-Durham, North Carolina; Silicon Valley; Charlotte, North Carolina and Austin, Texas. Salt Lake City grew at about double the rate of Phoenix.
The three U.S. submarkets with a higher net absorption growth rate than Tempe were Salt Lake City’s Tech Corridor, downtown Nashville and Seattle’s Lake Union area.