Arizona's California Effect

Pat Feeney

It’s been a bumpy couple of years for Phoenix commercial real estate in general, but thanks in part to what some people are calling the California Effect, the Valley’s industrial market’s year-end net absorption stats are poised to wind up in the plus column for the first time since 2008.

The California Effect refers to the impact of companies relocating from California or seeking a close-enough alternative to service Los Angeles/The Inland Empire. Although not entirely responsible for distribution buildings leading Phoenix industrial market activity this year, the increase in attention from these types of big-box users has been particularly noticeable. Even more encouraging is the fact that passage of Arizona’s tough new immigration law, SB 1070, has not had the negative effect on the market that some people feared. Not only has it not stemmed the flow of companies wanting to set up shop here, it’s not even been part of the conversation with most decision-makers.

According to Joseph Vranich, an Irvine, Calif.-based business relocation expert who tracks the California outmigration trend, Arizona is the second most attractive state in the country for companies moving from or cancelling plans to locate in California. Texas is No. 1. Colorado, Nevada, Virginia and Utah round out the rest of the top 5.

As of mid-October, Vranich’s research has turned up 158 companies that have either left or opted out of California this year alone, compared to 51 in all of 2009. Of those 158 companies, 16 migrated to Arizona. Eighteen ended up in Texas.

Vranich notes that his figures reflect reports found in public domain information only. The real exodus of companies from California is probably incalculable because so many are implemented without public notice.

Writes Vranich on his blog, The Relocation Coach, “Quite clearly, the exodus of businesses out of California continues. It makes sense for companies to reduce their California footprint considering the ample supply of attractive, lower-cost locations. Unless California reduces its hostility toward business, we will see more commercial enterprises seeking friendlier locations in which to relocate entirely or at least place facilities there that used to be located here.”

Vranich’s message comes through loud and clear from the California exodus crowd scouting Phoenix for warehouse and distribution space. They’re looking for reduced utility rates, labor expenses, taxes and workers’ comp costs, along with fewer regulatory pressures, more affordable housing choices for employees and less government red tape to go along with their Class A industrial space.

They — and others looking to take advantage of Phoenix’s newer inventory and value opportunities — are a key reason more than one third of all deal completions over 20,000 square feet occurred in the Southwest Phoenix submarket as of the first three quarters of this year. This submarket began seeing positive net absorption in early 2010 and has continued to improve, even as the rest of the Phoenix metro industrial market struggled.

The overall market took its first tentative steps toward recovery in the second quarter with 1.1 million square feet of positive activity. Yet, as of the third quarter, more than half of the Valley’s 28 submarkets were still losing more space than they gained, even though net absorption remained positive overall. Activity has picked up in all sectors of the market since October, and it will be interesting to see the hard evidence once fourth quarter numbers are published.

As the year comes to a close, market-wide industrial space net absorption is expected to reach a modest 3 million square feet (still off from a multi-year average of 6 million square feet net per year), with warehouse and distribution activity playing a large role in market recovery. Users – like the company owner presently shopping Southwest Phoenix for a 600,000-square-foot building in which to consolidate warehouse and manufacturing operations presently located in California, Nevada and Mexico — are impressed by what they see here.

One word of caution, however: supply may become an issue sooner than we think.

Right now, a 300,000-square-foot user has four buildings from which to choose. In January, there were 13. At this rate, we could be out of Class A warehouse and distribution space as early as six months from now.

It seems strange to even talk about new construction when the overall Phoenix industrial vacancy rate still hovers around 14 to15 percent. But, if demand remains as strong as it is right now, a case could be made for bringing more spec warehouse product online within the next year or two.

In the meantime, look for starting rents on available space to slowly increase in 2011, simply based on supply and demand. And if this year is any indication, keep an eye out for more California license plates cruising the streets of Southwest Phoenix searching for the next site for their warehouse and distribution operations.

— Pat Feeney, SIOR, is an industrial market specialist in the Phoenix office of CB Richard Ellis. He can be reached at 602-735-5555 or [email protected]

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