Categories Narrative, Office Market

How Do Star Wars and the Phoenix Office Market Relate? Q4 2015 Phoenix Market Report

Seeing Star Wars Episode VII: The Force Awakens recently I cannot help but draw a parallel to the world of Metro Phoenix office leasing. Why? Because, like “the force,” net absorption awakened in 2015 posting 3.4 million square feet. This is the highest absorption since 2005 and has pushed our vacancy rate below 20% for the first time in eight years. (By the way, 2005 is when the last Star Wars movie was released.)

The first three quarters of 2015 produced gradual job recovery, and the fourth quarter pleasantly surprised us with 1.9 million SF of net absorption. This was 56% of the yearly total in just one quarter. The growth has been driven by large users new to the market (e.g. State Farm Regional HQ & Zenefits), substantial companies existing in the Valley expanding (e.g. Wells Fargo, DriveTime), and many local companies growing. Consistent with the past few years, Tempe and Chandler led all submarkets in annual net absorption, posting 43% of the entire metro market.

Below is a link to our Lee & Associates 4th quarter report and as usual, I’ve included my top 3 takeaways below:

1.       Metro Phoenix Office Vacancy broke the 20% threshold and stands at 19.5% today. This means there will be upward pressure on rents in tight submarkets and certain product types.
2.       Rents continue to spike for trophy buildings or areas with walkable amenities. Some tenants will continue to pay these rates, but others will move to weaker submarkets or lower quality projects. Note that Midtown, with the highest amount of Vacancy in Greater Phoenix, absorbed four times as much space as the amenity-rich Camelback Corridor.
3.       Speculative construction is back in a big way. Over 1.3 million SF delivered in Q4 2015 alone and another 900,000 SF is now under construction. The majority of spec construction has been successful as most users have not been patient for planned projects.

If you have a question on your lease, want to find out how much your building is worth, or just want to talk about the market, please give me a call.


P.S.- Following up on our hilarious office space tour video with comedian Michael Kosta, we have a three week series of our real estate version of The Bachelor. In the below preview clip, we give you a first look at getting a rose. Or you can visit our website here to immediately watch the full version.

Bachelor 1 Video 3

If you are unable to play the video, please click here.


Click Here for the Q4 2015 Phoenix Market Report 

2015 Q4

Categories Narrative

Maquiladora- What does that mean?

Several weeks ago, I talked about the PC 16 (please click here for the narrative) and how Mexico was one of the 16. I grew up in Sierra Vista, Arizona less than 20 miles from the Mexican border. I follow Mexican manufacturing, its economy and the maquiladora program very closely. The 50 year old maquiladora program allows a factory in Mexico, run by a foreign company, to export its products to the country of that company.  
Mexico is positioned so strategically to generate a huge industry in electronics and other manufacturing businesses. Below is an older article from The Economist. A LOT has to change in Mexico for the country to take advantage of this opportunity, but I am hopeful.
This is not a sales pitch, but Mexico has:
–a strategic location to the U.S.
–50 years of cross border work
See my yellow highlights below for some issues that arise when doing business in Mexico. There’s opportunity and some drawbacks.


P.S. We proudly represented Ferguson on their real estate needs for Office and Industrial projects throughout the Western United States. Please click here to see our One Minute Case Study.

Ferguson_PostCard-WEB_Page_1 2


Mexico’s Maquiladoras
Big maq attack

A 50-year-old export industry that provides millions of jobs has to reinvent itself quickly to stay competitive


| TIJUANA | From the print edition


“ELECTRONICS are like drugs. You can buy them for $1 and sell them for $40,” says Jordi Muñoz, a 27-year-old Mexican entrepreneur. People in Tijuana, where he makes small, insectlike drones (pilotless aircrafts) for civilian use, would probably prefer he used a different metaphor: the city is trying to put its narcotic reputation behind it. But Mr. Muñoz feels free to say what he likes, because he has found the holy grail for exporters in Northern Mexico. He has brought inventive flair, not just deft fingerwork, to the process of making things.

Mr. Muñoz’s drone-producing plant is a maquiladora, a factory that enjoys special tax breaks. When Mexico set up the first maquiladoras half a century ago, they were sweatshops that simply bolted or stitched together imported parts, then exported the assembled product north across the border to the United States. America got cheap goods; Mexico got jobs and export revenues. Now, with competition growing from other low-cost locations, and with the government cutting some of their tax breaks, the maquiladoras are having to step up their efforts to become innovative.

On October 18th the lower house of Mexico’s Congress approved President Enrique Peña Nieto’s proposal to sweep away a range of deductions and allowances that the maquiladoras enjoy. In general, Mexico collects less tax than other middle-income countries, and the government is striving to raise more revenues to improve its lamentable public services. But the maquiladoras already face stiff competition from other countries offering juicy tax breaks to manufacturers: KPMG, an accounting firm, last year rated Mexico worse than five of its main rivals in terms of tax competitiveness. Accountants at another firm, Deloitte, reckon the reforms, if passed by the upper house in the coming days, will raise the maquiladoras’ effective income-tax rate from 17.5% to at least 30%.

Over the years the maquiladoras have already lost much basic work, such as stitching together fabrics, to cheaper places in Asia, like Bangladesh. But more recently, rising pay in Chinese factories has made Mexico look an attractive location once more. According to the maquiladoras’ industry association, their exports and foreign investment each grew by more than 50% between 2009 and 2012, to $196 billion and $7.4 billion respectively. Employment, having fallen sharply in the wake of the global financial crisis, rebounded by 25% to just over 2m, slightly above the average for 2007-08. Carmakers, in particular, have been investing heavily in Mexico in response to a recovery in sales across the border in the United States.

The lure of cheaper shores
However, the tax rise risks prompting a fresh wave of departures to cheaper shores: even impoverished Haiti is now touting itself as a hub for low-cost assembly. So the maquiladoras are having to up their game, moving into more sophisticated types of manufacturing and doing more product design. On the first score, there has been some progress: much of the stitching done in Tijuana these days is not of T-shirts but of finicky medical devices such as stents, made of fine pig tissue. The aim of Mr. Muñoz’s company and others like it is to go a step further and to get involved in design and development.

If they succeed, they stand to gain some of the investment that American manufacturers are expected to make, as they shift work closer to home in reaction to rising costs in China. Otherwise, those firms may instead be tempted to put their new plants in American states such as Nevada and New Mexico. These may not be able to match Mexican labour costs, but they have a better-educated workforce and are offering attractive tax rates and utility costs.

Aerospace and defence companies are among those thought likely to “nearshore” some of the manufacturing currently sent to China. The maquiladora zone near Tijuana already has more than 50 firms in these industries, and it is here that the efforts to become more innovative are most visible. The Tijuana plant of Zodiac Aerospace, a French company, makes aircraft interiors. Downstairs, nimble-fingered women glue window-frames onto interior panels, and technicians operate machines that cut, stamp and weld metal parts. But upstairs, young engineers are hunched over computers. One is designing from scratch a netting system for planes’ overhead lockers, to stop luggage shifting during flights. He has proudly attached a note saying “Made in Mexico” on his screen.

His boss, Raúl Pérez, says that product design is the next logical step for his firm—and for Mexican manufacturing in general. “It hasn’t been easy,” he admits. Mexican universities and colleges tend to produce engineers expert in industrial process rather than products; they are good at making production lines more efficient, but not at inventing what goes on them. So Zodiac, which used to train recruits in-house, now sends its staff into universities to teach, and helps design courses that will produce engineers suitable for his industry.

Even more than other industries, aerospace needs skilled and versatile workers. Honeywell, one of the biggest aerospace firms in the region, employs 350 people in the design, engineering and testing of aircraft components in Mexicali, the capital of Tijuana’s home state of Baja California. But on a recent visit, its boss, David Cote, told reporters the talent pool lagged other potential aerospace hubs such as eastern Europe. He said Mexico needed more multi-skilled engineers able to work in mechanics, electronics and software.

Another drawback for the maquiladoras is that they have not developed local suppliers: less than 5% of their inputs are sourced within Mexico. Aerospace is a particularly demanding field because safety standards require a high degree of certification for all the parts that go into an aircraft; and suppliers making components for defence equipment are subject to strict security requirements.

To become a plausible aerospace “cluster”, and attract more investment from the world’s top manufacturers, the maquiladoras around Tijuana need to bolster the local supply chain, as well as produce more engineers capable of product design. For decades, low costs have made the maquiladoras one of the two main pillars of Mexico’s exports, second only to oil. From now on, creativity will be a better way of beating the competition than cost.


Categories Narrative

300 and Counting

Time flies. The market changes. Cycles occur. AND as of today, this is our 300th narrative. We have grown from 700 to over 28,000 weekly readers with an open rate that is double the industry standard. Thank you for your support and readership.

For 2016, we are going to add some humor throughout the year…Please watch this thirty second preview before you read the rest of the narrative:

This is a preview only – to watch the full version, click here!

Kosta Tour 3

If you can’t get the video to play, please click here.

We think we have the best commercial brokerage website in the business. To help you get to know our site, we have a series of awesome videos we are going to send as part of our narrative every other week for the first half of 2016. I promise they will be laugh-out-loud funny and worth a few minutes of your time. Like today, each video preview included in the weekly narrative will be a short teaser. You will always be able to click directly to the full video if you want.

To enjoy today’s entire video and our take on office space humor click here.



Categories Narrative

Arizona to Lead in Job Growth

Some good news for Arizona job growth (my key indicator for office space net absorption). In November, Forbes projected Arizona to lead the United States in job growth for the next couple years. Traditionally, Arizona has been a boom/bust cyclical state. Readers of this narrative know that this cycle, for the first time, we have not been in the top three in job growth. While we are still in the top 10, the growth has been anemic (for our standards).

So, this article brings good news as we look forward for Arizona. Getting back to robust job growth is a welcome sight.

If your company is expecting rapid growth in the next few years give me a call. We specialize in strategic planning to make sure your space needs are met for years to come.



Why Forbes projects Arizona to lead U.S. in job growth

Stefan Modrich, Cronkite News

12:16 p.m. MST November 18, 2015

AZ Job Lead  (Photo: Stefan Modrich/Cronkite News)

Forbes Magazine has named Arizona the best state for future job growth, but one local economic expert said the distinction does come with some caveats.

The magazine in October used forecasts from Moody’s Analytics to call Arizona one of the “brighter spots in a slumbering U.S. economy thanks in part to renewed migration.”

The Moody’s report projected a job growth rate of 3.1 percent through 2019.

As the U.S. economy slowly recovers from the Great Recession, experts said Arizona has become a landing spot for expanding businesses because of its skilled workforce, available real estate and diversified economy.

“It’s never been a problem getting people to relocate to Arizona,” said Lee McPheters, a professor of economics at Arizona State University’s W.P. Carey School of Business. “They might very well look at Arizona as a good place to be moving. As a company tries to expand, you can get people to move from the Midwest or from California.”

State and local officials recently announced several expansions into the state: Northern Trust Bank, Home Depot and Santander Consumer USA Holdings Inc.

But the Forbes article and McPheters warn that forecasts can change quickly. For example, a blow to a major industry such as tourism in Arizona could significantly change the state’s prospects, as could competition from other states.

Development on the upswing

Large companies headquartered in the Midwest and Southeast are expanding in the Valley and bringing plenty of jobs with them.

Chicago-based Northern Trust Bank expects to add 1,000 jobs at its new Tempe operating center by 2018. Home Depot Inc., headquartered in Atlanta, will add about 800 jobs to its Tempe call center in an existing warehouse in 2016. Dallas-based Santander Consumer USA Holdings Inc., a consumer finance firm, plans to hire up to 970 employees at a new facility in Mesa, according to the Greater Phoenix Economic Council.

Even McDonald’s plans to hire 2,000 people during a job fair on Wednesday.

Home Depot spokesman Matthew Harrigan said CEO Craig Menear saw the Tempe center as opportunity to build on the company’s retail presence in Arizona.

“These investments are advancing our interconnected retail strategy, which allows our customers to engage with Home Depot however they choose,” Menear said in a statement. “We’re also pleased to contribute to the economic growth of these communities.”

In an increasingly service-based economy, Tempe Online Contact Center Director Bill Parhar said large retail stores like Home Depot need to accommodate a growing online customer base.

“Arizona has always done well in attracting call centers,” McPheters said.

Companies like General Motors, which opened an IT center in Chandler in September 2014, are bringing higher-wage jobs.

A GM software developer in Chandler makes $77,000 on average, 16 percent more than the average GM salary, and $10,000 more than a typical software developer earns, according to Career Bliss.

GM Chief Information Officer Randy Mott said the opportunity to hire coders and engineers from universities in the region helped sway GM officials to move to Arizona. The expansion will bring 500 more jobs to the center by 2018, in addition to the 500 already hired, officials said.

Economic oasis in the desert

Arizona’s job outlook has been in large part shaped by a steady influx of baby boomers retiring to the desert, McPheters said.

“There’s a path toward economic recovery (in Arizona),” McPheters said. “We’re a lower cost state than our neighbors, one that continues to attract retirees, which creates jobs in food service and health care.”

McPheters said the Valley’s combination of available infrastructure and a talent pool of young college graduates also work in the state’s favor when companies look to leave an economic footprint in Arizona.

“We have office space,” McPheters said. “We have a readily available labor force with a lot of young, reasonably well-educated, capable workers.”

That availability of college graduates incentivized Home Depot’s expansion.

“Tempe just rose to the top,” Parhar said. “The higher education here and having a strong recruiting base is important when you’re trying to ramp up a new site.”

GM officials also cited the educated workforce as a plus.

“The majority (of new hires) have come from Arizona State, University of Arizona, Brigham Young University and Northern Arizona University,” Mott said in a statement. “GM is targeting recruitment efforts at up to a dozen key universities within each geographic region.”

Another reason Arizona has become a popular option for companies looking for presence in the West is the outreach and involvement from local civic groups like the Greater Phoenix Economic Council and Arizona Chamber of Commerce, Parhar said.

“They were very eager to help us, which you don’t always see in other communities,” Parhar said. “In the process of selection, they were actively involved with our real estate partners and providing us data.”

AZ Job Lead 2

The Phoenix Mountain Preserve is one of several open space parks in Maricopa County which facilitate economic activity in the communities they serve.

As competition increases, challenges lie ahead

While Moody’s projected to lead the U.S. in job growth in 2016, Arizona had the 10th-best job growth rate in 2015, according to the Bureau of Labor Statistics. Arizona’s neighbors – Utah, California and Nevada – were ranked higher in 2015, according to the bureau.

McPheters said future projections may not account for competitive growth from other Western states.

“Arizona certainly is going to be one of the stronger growth states,” McPheters said. “But it’s really not likely that we’re going to be the top growth state in 2016.”

Utah is attracting high-tech jobs, and like Arizona, isn’t dependent on energy like Texas, whose growth subsided with falling oil prices and lessened demand, McPheters said.

In Arizona, however, the unemployment rate, at 6.3 percent as of September, remains higher than the national average of 5.1 percent and has continued to increase since May.

Post-recession, the Arizona housing market prospered, but if the Federal Reserve raises interest rates, housing prices could be affected, he said.

There’s also competition from Oregon and Washington, which had higher job-growth rates in 2015, according to the Bureau of Labor Statistics.

But McPheters said the progress Arizona has made is encouraging to both local and regional businesses with an eye on expansion opportunities.

“There aren’t a whole lot of obstacles in Arizona,” McPheters said. “The opportunities outweigh the obstacles significantly.”

Here is a secondary article on the same topic

The Best States For Future Job Growth

Kurt Badenhausen
Oct 21, 2015 @ 9:45am

Arizona was absolutely hammered during the financial crisis of the late 2000s. Median home prices in the state plummeted 53% over five years from $250,000 in 2006 to $117,000. The foreclosure rate was the second highest in the U.S. for three straight years as construction ground to a halt. Unemployment peaked at 11.2% at the end of 2009 and net migration into the state fell sharply.

But Arizona has emerged from the wreckage to be one of the brighter spots in a slumbering U.S. economy thanks in part to renewed migration. Arizona’s projected job growth is 3.1% annually though 2019, best in the U.S., according to forecasts from Moody’s Analytics.

“Baby boomers retiring to Arizona is the main driver for Arizona’s employment growth,” says Kyle Hillman, an economist at Moody’s focused on Arizona. This migration fuels jobs in healthcare and consumer services. Net migration into the state is projected to total 679,000 over the next five years. Only Nevada is expected to enjoy a faster migration rate.

Companies and workers are also finding their way to Arizona as a more affordable option to West Coast locales like the Bay Area and Seattle. The state offers a diversified economy with a skilled workforce.

Financial service firms have a heavy presence in Arizona with Wells Fargo WFC +0.00%JPMorgan Chase JPM +1.52% and Bank of America BAC +0.00% among the 10 largest private employers in the state. In February, Northern Trust NTRS -1.37% announced plans to expand in Arizona by opening a new operating center in Tempe that will house 1,000 employees by 2018. “This step will provide us with access to significant talent pools and a strategic location that will help us efficiently serve our clients,” said CEO Frederick Waddell in a statement announcing the news.

General Motors GM +0.00% opened a software-development center last year in Chandler, Ariz. with 500 employees and plans to add another 500 workers over the next three years. Many of the coders and engineers will be drawn from nearby Arizona State University.

Nevada has the second highest projected job growth rate at 2.9% a year. Nevada’s economy is less diversified than Arizona’s, as it leans heavily on tourism and mining for growth. Nevada has the highest average unemployment rate in 2015 at 6.8%, according to Moody’s, but that is down from 13% in 2011.

Las Vegas is the engine that makes Nevada go with 70% of the states’s $132 billion in economic activity based in Sin City. But the state has attracted non-tourism businesses in recent years as well. Tesla picked a location outside of Reno last year for its $5 billion lithium-ion battery factory. Governor Brian Sandoval offered the Elon Musk-founded company $1.25 billion in tax breaks over 20 years, but the factory is expected to create 6,500 jobs and $100 billion for Nevada’s economy over two decades. The factory is expected to be completed in 2017 when Tesla begins production on its $35,000 Model 3 electric car.

Rounding out the top five states for future job growth are Florida (2.7%), Utah (2.5%) and Georgia (2.4%). Utah ranks at the head of the pack in Forbes’ Best States for Business for a second straight year.

Not all jobs are created equal. Median household incomes are north of $60,000 in Utah, Washington and California, but are less than $53,000 in the other seven states projected to add jobs at the fastest rates.

Keep in mind that forecasts can change in a hurry. Arizona, Nevada and Florida are all heavily influenced by tourism, and a sudden downturn in the economy or jump in gas prices would dampen employment prospects. Texas had the fastest job growth projections a year ago, but lower energy prices laid waste to those forecasts. Texas fell out of the top 10 for job gains this year.

Modrich, Stefan. “Why Forbes projects Arizona to lead U.S. in job growth”. Cronkite News 12:16 p.m. MST November 18, 2015
Badenhausen, Kurt. “The Best States for Futute Job Growth”. Forbes 9:45 a.m. October 21, 2015



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