Phoenix, which has long been one of the fastest-growing regions in the United States, reached a notable demographic milestone recently — the U.S. Census Bureau reported that it officially grew faster than any other area of the country between 2010 and 2020. The city added more than 160,000 residents during that time, an increase of 11.2%, and it surpassed Philadelphia to become the nation’s fifth-largest city.
The more than 900 members of NAIOP Arizona, one of the association’s largest chapters and a 2022 Chapter of the Year winner, handle every product type in commercial real estate. Suzanne Kinney, president and CEO of NAIOP Arizona, spoke to Development magazine about what’s going on in the Phoenix market
Development: How are the market conditions for member companies in your area?
Kinney: Phoenix has been one of the top-performing industrial markets in the country due to incredible tenant demand. It remains a landlord’s market, with most new development being built on spec and leasing up well before completion. According to JLL, Phoenix delivered more than 2.9 million square feet of new construction in the first quarter of 2022, but robust demand from space users absorbed nearly 4.6 million square feet. But like much of the nation, construction costs and materials shortages are the biggest challenges our members are facing in the Phoenix area, with costs up 20%-30% across all product types. So far, developers have been able to partially absorb those higher costs with rent growth; Cushman & Wakefield reports that industrial rents in the Phoenix area are up a healthy 12% over the past year and 21% since the first quarter of 2020.
Development: What are the challenges you’re facing in either the business or regulatory climate in your area?
Kinney: Phoenix has long been known for its attractive business climate, and conditions remain very favorable overall. However, one recent trend that has started to create a challenge for the business environment is affordable housing. While Phoenix has traditionally benefitted from affordable housing options relative to peer cities, the median price of a single-family home jumped nearly 33% between January 2021 and January 2022, according to the Case-Schiller index. Meanwhile, local apartment brokerage ABI Multifamily reports that average apartment rents have increased more than 25%. These higher housing costs are making it more difficult for businesses to attract, retain and grow their workforce. More housing is in the pipeline as we had over 34,000 new single-family construction permits pulled in 2021, and ABI reports nearly 38,000 new multifamily units are being built as well.
Development: What are the big opportunities in commercial real estate in your area right now?
Kinney: Opportunities in the Greater Phoenix area are driven by robust expansion of 21st-century manufacturing industries within our market. Intel is expanding its semiconductor factories in Chandler, while Taiwan Semiconductor Manufacturing Corp. is building a massive $12 billion plant in North Phoenix. These multi-billion-dollar capital investments will ensure that Phoenix is the leading domestic source of semiconductors for decades to come. Further, electric vehicle manufacturers Lucid and Nikola have constructed large assembly facilities in Pinal County, just south of Phoenix, and ElecctraMecchanica selected Mesa as its U.S.-based assembly facility and engineering technical center. The economic gain to Greater Phoenix from these large investments multiplies when you include the suppliers these manufacturers bring along with them. Sunlit Chemical is constructing a $100 million facility in North Phoenix to produce chemicals used in semiconductor manufacturing, while LG Energy Solutions plans to build a $1.4 billion high-tech battery plant in the East Valley.
Development: What are some of your legislative priorities?
Kinney: Our chapter is actively involved in advocacy at the Arizona State Legislature and at other levels of government. This legislative session, Arizona has the largest budget surplus in our state’s history at around $5 billion, according to the latest estimates by the Joint Legislative Budget Committee. At the time of this writing, the legislature has not yet come to a budget resolution. However, this fiscal environment has led to opportunities to reduce taxes and make strategic investments. On the tax front, we achieved one of our long-term priorities of bringing down the assessment ratio on commercial property to a more competitive 15%.
We are also engaged in conversations on how to resolve long-term water supply issues. Thanks to wise planning over the past century, Arizona’s municipal water users will have a better supply than the national media would lead investors to believe. With our budget surplus, there is strong support to invest more than $1 billion in water-conservation technologies and augmentation, which will position us well for the next century of growth.
We expect to see significant investments in our highways, arterial roadways and airports. Of particular importance is a proposed $400 million investment to widen a portion of Interstate 10 connecting Phoenix and Tucson, which is expected to draw down another $300 million in federal funds thanks to the Infrastructure Investment and Jobs Act championed by Senator Kyrsten Sinema (D-Arizona).
Development: Education is an important part of NAIOP’s mission. Have there been recent educational sessions specific to your chapter recently?
Kinney: The Arizona chapter hosts a range of educational programs. With an open race for governor this year, we held a series of six events called Coffee with Candidates. Three Democratic candidates and three Republican candidates each met with NAIOP members to answer questions and talk about their policy positions. Also in the first half of 2022, we hosted a special event with celebrity restauranteur Sam Fox about the future of restaurants, hospitality and hotels. More than 300 members attended. We had an insightful program with economist K.C. Conway, who covered macroeconomic issues that would impact business generally and the real estate industry specifically over the next few years. In addition to these special programs, we continue to host free continuing education programs for members to renew their real estate licenses. And each semester we teach a practicum for students in the Master of Real Estate Development program at Arizona State University. Our Developing Leaders have held their own events such as programs on inflation and materials costs and site selection complications. They also hosted a project tour of The Beam in Tempe, an innovate office building constructed of cross-laminated timber.
Trey Barrineau is the managing editor of publications for NAIOP.