Phoenix’s Housing Costs Steer Site Selection

Market Insights
August 11, 2016

Phoenix has long been known as a location that offers corporations in high-cost East and West Coast metros a deep and talented labor pool and lower costs of doing business. As more firms put Phoenix on their short list for a relocation or expansion, some companies are discovering that it is no longer a flat landscape in terms of office space and housing costs.

Housing costs will restrict where some companies can base their operations. A location in Scottsdale where the average home price exceeds $300,000 may be ideal for an engineering or high-tech firm, but not for an insurance or health care company setting up back-office operations. Instead, a Southeast Valley location such as Mesa and Gilbert, where homes are priced below $200,000, would align better with their employees’ housing requirements.

As more businesses migrate to the East Valley, they are discovering that they can cut down on the commute time if they are located along the Loop 101 and Loop 202 freeways. Such locations offer prime access to reasonably priced housing product. For example, health insurance firm Oscar, selected a 95,000-square-foot space at The Circuit in Tempe that enjoys proximity to the intersection of the 101 and 202 freeway. The New York-based company plans to hire 200 employees to staff its health care concierge center.

While Oscar is a relative newcomer, many of the companies relocating to Phoenix or setting up backup locations in the market have been around much longer. They are generally stable, mature firms that require large quantities of space in the 50,000 to 100,000-square feet range. Tenants new to the area requiring this much space will have few options in the more sought-after locations such as Old Scottsdale or Downtown Tempe. Aside from high housing costs, there are very few large blocks of space remaining in these micro-markets. Mid-sized tenants requiring a lot of parking will be challenged in these submarkets as well.

Smaller and mid-sized tenants seeking 20,000 to 50,000 square feet of office space have more options, particularly if they are geographically flexible. Limited new construction activity and steady activity has slowly drawn down availability in more submarkets, though. The vacancy rate for the entire Phoenix region (18.3%) is still very high relative to most markets, but it has fallen steadily from its peak of more than 24.0% in 2011. Vacancy is even lower once outdated buildings with inefficient layouts, building infrastructure and technology are excluded.

A handful of submarkets have very scarce space options, some with vacancy rates under 15% These locations aside, most companies--particularly smaller and mid-sized tenants--still have multiple options to choose from so that they can avoid leasing in antiquated buildings with functionally obsolescent infrastructure and outdated amenities.

Something to be mindful of for businesses coming to Phoenix is mass transit availability. Transit service is limited to a very few submarkets – Midtown and Downtown – and occupancy in properties with proximity to light rail is a bit higher.