The Phoenix Office Market continues to evolve to meet the demands of today’s employers who battle in the war to retain and attract talent. Those buildings who have all the “right stuff” will win the battle for tenant lease commitments. While brokers, owners and capital partners argue and negotiate tenant improvement allowances, rental rates and terms; employers are focused on the availability and cost of labor. As one human resource manager shared at an industry event – “a $1.00 per hour increase in my wages equates to a $12.00 per square foot increase in my rent. I’m focused on my labor.” The right stuff is simple in concept and includes the right location; the right amenity delivery; the right image, the right parking; and the best “value” proposition as further highlighted below.
Access to labor and the cost of labor is the number one criteria for employers. Hence the vast majority of demand for office space is in suburban submarkets, not the downtown/midtown central business district. This is particularly true for large space consumers in the insurance and financial services sectors evidenced by major space commitments by Centene, State Farm, USAA, Liberty Mutual, Wells Fargo, Northern Trust, Bank of the West, Union Bank, JP Morgan, and Freedom Financial. The bulk of this activity is in the Tempe and Chandler areas.
In an effort to secure lease commitments, astute building owners are positioning their buildings with amenities in an effort to help tenants win the labor battle. This comes in the form of on-site food services as well as outdoor entertainment and gathering areas, lounges, game rooms, and conferencing areas. The number one item of importance for millennial workers is access to the food experience and walkable access to adjacent food services are very important. If walkability isn’t available, then having on-site food services such as food trucks and “grab-n-go” areas is critical.
Remember the ads “this is not your father’s Oldsmobile?” In the same vein, millennials don’t want to work in their father’s office space. Open ceilings, glass walls, open kitchen areas and modern design finishes are required in the premises and building common areas. This means higher common area capital expenditures and tenant improvement allowances need to be underwritten for office building buyers and developers.
Driverless cars aren’t here yet and increased employee density associated with cubicles and bench style seating, parking remains the “tail that wags the dog.” Parking ratios of 6 to 7 per 1000 RSF are more common. Proximity to light rail is also a plus and owners who locate near access stations see an increased demand for their buildings, provided the other right stuff exists.
Tenants have demonstrated that they will pay more in rent, if the space offers all of the above items, since it delivers a value proposition that helps the them win the war for talent and keeps their wage rates in check; thereby enhancing the company’s bottom line.
Mike is an Executive Managing Director at Cushman & Wakefield with over 30 years of brokerage experience focused in the office building sector.