December 1, 2016
Is there life outside Silicon Valley? Absolutely.
The demand for office space in the nation’s technology hotspots –the Bay Area, and increasingly, Manhattan’s Silicon Alley -is driving rents in those markets to new heights. Average rents in San Francisco have nearly doubled in the last five years, and recently surpassed those in Manhattan. Both markets are commanding over $70 per square foot.
These head-spinning rents, as well as the intense competition for space in those markets, have lead many tech companies, particularly the young, to venture into new, more affordable secondary markets, like Nashville, Charlotte, Tampa, Seattle, and Phoenix.
These cities offer better leasing terms as well as affording employees a lower cost of living. Smaller markets are seeing a large influx of so-called “tech talent.” The elements that characterize these cities include a high level of educational attainment, low cost of living, and the presence of millennials.
Taking those into account can help us to understand the shift that’s occurring in Phoenix’s tech landscape. According to 2015 figures, over 55% of Phoenix residents have completed an associate’s degree or higher, compared with around 40% nationwide.
Compared with places like San Francisco, Manhattan, and even Seattle, the cost of living in Phoenix, as well as the cost of doing business are very attractive. Living in Phoenix costs about half what it does in Seattle, and running a business in Phoenix, where tax rates are well below the national average.
It makes sense for new and growing tech firms to take advantage of these benefits, and they’re looking for cities that combine lower costs with a desirable lifestyle. Since tech companies account for nearly 20 percent of all office space leased in the U.S., secondary cities are happy to cater to their priorities.
In Phoenix, entrepreneurs and startups are attracted by commerce initiatives like the Arizona Innovation Challenge and accelerators like the Center for Entrepreneurial Innovation at Gateway Community College.
Established tech companies from the Bay Area have also taken note of the cost savings and available talent in Phoenix. Several have relocated or expanded into Phoenix in the last 5 years, including DoubleDutch, Gainsight, Uber, Prosper Marketplace, Yelp, Weebly, BoomTown and Shutterfly.
This movement has led to decreased vacancy rates in the Phoenix office market. Vacancies stood at 16.6% at the end of Q2 2016, compared with 18.1% a year ago, according to Colliers. Meanwhile rents in Greater Phoenix are up by more than 5% for that period. Continued tightening of inventory and a wave of new tech company tenants will likely encourage rent growth. Still, the area has a long way to go before rates approach those in the country’s tech capitals, and that’s a very good thing.
To meet the increased demand for commercial space, the city government is working to provide incentives for new development as well. It’s offering significant tax incentives for projects aimed at revitalizing underused areas of the city, like the one proposed for a downtown parking lot between Cityscape and Collier Center.
The developers could be paid as much as $18 million in tax rebates on the project, which will include retail space and apartments as well as high-tech office space.
To learn more about commercial real estate in Phoenix, visit our city page!