Southeast Mesa Strategic Development Plan Mesa, Arizona
Current Trends Economic Base Memorandum
Prepared For: The City of Mesa
Prepared By:
Elliott D. Pollack & Company 7505 East Sixth Avenue, Suite 100 Scottsdale, Arizona 85251
In Partnership With: Lee & Associates
October 2007
Task 2d: Current Trends Economic Base Memorandum
TABLE OF CONTENTS
Executive Summary i
1.0 Introduction 1
2.0 Regional Demographics and Economic Outlook 6
3.0 General Commercial Market Trends – Metro Phoenix 23
4.0 Local Competition for Business Locations 56
5.0 Examples of Development Sequencing 81
6.0 Perceptions of the Development Community 97
7.0 Analysis of Reliever Airports 105
8.0 Summary and Conclusions 121
TOC Task 2d: Current Trends Economic Base Memorandum
Executive Summary
Elliott D. Pollack & Company has been retained to provide an economic evaluation of the development potential of the area surrounding Phoenix-Mesa Gateway Airport in Mesa, Arizona. The study area that is the focus of this analysis is referred to as the Land Use Evaluation Area and includes approximately 33 square miles of land. Because of its large scale, the implementation of a successful development plan will be of benefit not just to the City of Mesa residents, but to the broader region as well.
Analytical Framework
This analysis begins with a macroeconomic assessment of the overall commercial real estate market in Metro Phoenix. The study then narrows in focus and includes an evaluation of recently released population and employment projections from the Maricopa Association of Governments on the more proximate region. This analysis concludes with the development of alternative scenarios of growth in the Southeast Valley and, more specifically, to the market area surrounding Phoenix-Mesa Gateway Airport.
A competitive analysis of other airport and commercial sites was also conducted as part of the research into the growth potential of Phoenix-Mesa Gateway Airport. This included a review of the economic characteristics of the Mesa Gateway Area along with similar analyses of various alternative employment centers throughout the Valley. The competitive analysis also includes a review of the long term potential of various industries that may be targeted for location in the area.
To some extent, the macroeconomic analysis contained in this report provides some perspective into the upper and lower economic development bounds of the Mesa Gateway Area. This perspective, when combined with more targeted analysis regarding MGA economic development potential, will establish the foundation from which to formulate a strategic development plan. The airport specific analysis and formulation of a strategic plan will follow in subsequent memorandums on this topic.
The following recommendations are broken down by breadth of issue. The macroeconomic conclusions are primarily broad recommendations that need to be considered as the City of Mesa moves forward with the implementation of its final economic development strategy. The microeconomic conclusions are primarily focused observations that support the formulation of the macroeconomic conclusions.
Macroeconomic Conclusions
The Greater Phoenix economy is currently built on sound economic fundamentals that have not changed. This bodes well for the long term development of the Phoenix-Mesa Gateway Airport. However, the next handful of years might prove to be difficult. In addition to impacts related to a slowing national economy, the health of the local residential real estate market will continue to worsen until we reach a balance between
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supply and demand. This equilibrium will not occur until the area fully absorbs the tens of thousands of excess single family residential units that were built in 2004 and 2005, and until permitting activity stabilizes to again match population inflows. In addition, it is likely that this short term condition will begin to weaken the currently strong commercial real estate market by this next year. Again, these are short term conditions that need to be considered, but will ultimately have minimal impact on the long range strategic plan for the Phoenix-Mesa Gateway Airport. The following represents the primary issues that indeed need to be considered while formulating this plan.
Regional Influences Possibly the most important point that needs to be made is that, because of its disproportionately large employment center, the City of Mesa will not be in full control of its own destiny related to commercial development. While the successful development of the site is certainly of significant value to City residents, the demand for commercial space and the provision of area employees will come from the broader region. Planners and administrators will need to be vigilant in keeping up with the broader region’s economic development activity and will need to consider these development conditions when formulating interim, short term strategies. The City of Mesa is not an economic island.
Development Timing Development timing is another major macroeconomic issue. The extent of development success will vary considerably from decade to decade. Through 2010, competition from other parts of the Greater Phoenix area will limit expansion potential. This will be exacerbated by the fact that additional population growth in the Southeast Valley must occur to achieve a truly superior employment and population base. During this period, planners can expect the business locations to be dominated by industrial operations. It is possible that during the first decade some form of inducement will be required to make the area competitive in terms of business locations.
While it may not be economically optimal for local cities to provide “giveaways”, basic incentives are now part of the global economic development culture. To the extent possible, the City should utilize and promote state programs and provide low or no cost City specific incentives on an as needed basis. These could include some form of tax or development fee abatement or reduction. These could also include some cleverly constructed incentive packages that only benefit the locating business if the company remains at the site for an extended period of time. Of course, the use of incentives will be limited by the City’s fiscal conditions.
During the second decade, the Mesa Gateway Area will surpass most other parts of the Metro Phoenix area in terms of preferred location attributes. If the proposed south region freeway indeed connects to I-10, the value will increase even further. During the 2020 to 2030 decade, assuming proper planning, the airport area should begin to see a shift in development activity from industrial to office uses.
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Opportunities by Industry During all phases of development, planners and economic developers can pursue businesses in many types of industries. The old model was for aerospace companies to locate near secondary and reliever airports. However, global competition has resulted in the need for companies in many other industries to further utilize air transportation to deliver goods in a timely manner and to reduce inventory holding costs through just-in- time strategies. This new model means that regional planners can look beyond the typical set of industries and seek out companies that have the best opportunity to bring dollars into the region, create additional spin off operations, and create higher wage jobs.
Ultimately, there are multiple levels of opportunity that must be understood. First, long term growth opportunity varies by industry. For example, the telecommunications industry appears to have less opportunity for growth than biotechnology, for instance. However, biotechnology does not typically produce high levels of employment and may be difficult to attract to the Mesa area since state efforts are being focused on Downtown Phoenix. Each industry has a different economic outlook and potential for expansion into Arizona, Greater Phoenix, and the Phoenix-Mesa Gateway Airport area.
Next, opportunity for expansion specifically into the Mesa Gateway Area also varies by industry. The City of Mesa posts certain natural economic advantages and disadvantages. These basic economic advantages and disadvantages can be enhanced or dampened depending on the quality of the local planning efforts. Some site specific advantages include the close proximity to a freeway, significant opportunities for airport related commerce, opportunities for rail related commerce, the on-site location of Arizona State University, and the improving regional workforce quality. Different industries have different needs. The specific needs of each industry must be fully understood.
Finally, the City of Mesa must have a preliminary vision for the area. The intersection of: 1) the individual industry outlooks and needs, 2) specific Mesa Gateway Area economic advantages, and 3) the City of Mesa economic development vision, will ultimately produce the optimal strategic focus. Ultimately, a well considered development plan will aid in creating a favorable branding of the airport region, thus resulting in benefits beyond the listing of specific site location factors.
Aerotropolis One stakeholder entity has introduced the term “aerotropolis” into the discussion of the future of growth of the area. It is based on the premise that airports are essential for businesses’ ability to compete in the global market given the heightened role of logistics and distribution in meeting customer expectations. In fact, airports in the 21st century are being compared to the impact of cars and trucks on urban development in the 20th century and railroads in the 19th century.
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Supply-chain linked businesses involving just-in-time and custom manufacturing have become a major competitive advantage for manufacturers. Speed and agility to meet market demands are important for productivity and pricing. Access to an airport facility can be an important advantage although many experts agree that companies can achieve the same results if located even ten or twenty miles from the airport.
To date, primarily larger airports have included this concept in any strategic planning. However, as part of the upcoming strategic analysis of the Mesa Gateway Area, it may be a useful exercise to identify any elements that are directly relevant to this exercise.
Microeconomic Conclusions
A detailed economic assessment of the various regional markets is provided in the body of this report and will not be repeated in this summary. However, this review of market conditions and momentum does provide the foundation for the observations and conclusions presented below. Overall, the feedback provided from the interviews is consistent with the economic assessment provided in the previous section.
Perceptions of the Development Community In order to determine the perspective of the commercial development industry with respect to the future employment (office/industrial) demand for the Mesa Gateway Area, Elliott D. Pollack & Company engaged Lee & Associates Arizona to conduct interviews of developers of employment real estate and land investors. The Lee & Associates team talked with a diverse group of over 20 office developers, industrial developers & land investors. The developers included those with existing positions in the study area as well as those without position.
Developers who do not have a presence in the area find it very appealing due to the location of the airport, the ASU Polytechnic Campus, Levine/DMB’s projects, as well as the completed Loop 202 freeway. However, the developers feel the City needs to help in defining the area and attracting business other than industrial and aviation users. They feel that there also needs to be an increase the amount of residential density in the area for the jobs that will be created as well as providing support for the ASU Polytechnic Campus. By aligning the area with the Polytechnic campus and focusing on education linkages, the area could define the types businesses that locate in the area.
Some of the concerns that were raised revolve around infrastructure costs and the planning of the area. Roads and amenities such as sewer, water, power, need to be put in to allow for easy access to their sites. The City, as well as the airport authority, needs to cooperate with the developers in helping them through the entitlement phase as this could slow down the development. Funding sources for these roads and amenities needs to be identified and not put solely on the backs of the developers/landowners. A complete review of the interview responses is provided in the body of the report.
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Additional Miscellaneous Conclusions The following bullet points address additional considerations that may prove to be important in the regional planning process:
• Rail service in the area is not today a primary course of action due to the requirements of Union Pacific and the limited interaction between rail and air freight. In addition, the airport is at a competitive disadvantage to the historic distribution and warehouse region of southwest Phoenix. However, in the longer term additional opportunities could materialize. Despite the short term limits, future rail access for industrial uses should still be considered a positive economic attribute.
• The City should encourage compatible uses today in order to jump start development, recognizing that change will occur in the future. These compatible uses may be in the form of flex-industrial buildings that can accommodate a wide range of employment uses, from office to small manufacturing operations. Methods to assist in infrastructure development must occur today so as not to burden the pioneer developers who are willing to absorb the risk of developing in a new market.
• While residential development is now on the doorstep of the airport, there still needs to be further growth of the residential market and available labor force before extensive employment-related development occurs. Because of the scale of employment uses being considered, the City of Mesa will indeed be reliant on the development of the region as a whole. The broader Superstition Vistas area holds the key to providing this labor force in the long term. The following table shows the population and labor force within five and ten mile radii of MGA and other major employment centers in Metro Phoenix.
Population and Labor Force Analysis For Select Areas1/
Population Labor Force
Radius (Miles) 2000 2007 2012 2000 2007 2012
Mesa Gateway Area 5 40,471 106,606 150,213 18,783 49,476 69,714
10 386,799 595,881 735,353 179,576 276,645 341,397
Scottsdale Airpark 5 163,617 179,622 203,047 90,068 98,878 111,773
10 490,079 541,551 615,927 267,410 295,496 336,079
Deer Valley Airport 5 238,156 265,246 302,029 134,705 150,028 170,833
10 812,450 909,358 1,032,329 433,005 484,653 550,192
Sky Harbor Airport 5 294,744 337,930 384,445 136,447 156,439 177,973
10 1,060,717 1,189,810 1,338,088 527,969 592,224 666,029
Westgate Area 5 238,873 301,111 350,626 108,752 137,087 159,629
10 858,581 1,103,259 1,295,956 387,697 498,182 585,196 ______1/ Years 2007 and 2012 data are forecasted by ESRI. Source: Hanley Wood, ESRI, Elliott D. Pollack & Co.
• The branding of the Mesa Gateway Area with a strong vision and plan is important for its future success. The Mesa Gateway Area needs to be considered desirable and recognized as competitive with the Alliance, John Wayne, and Ontario Airports as a burgeoning business location, recognizing its assets and future growth potential. The
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area’s reputation will be defined based on perceptions of being customer friendly, the ability to attract notable businesses, and the overall scale and quality of development. With this branding, the Mesa Gateway Area will be able to compete more effectively in the local marketplace against other employment centers.
Growth Scenarios The following growth scenarios were developed for the Mesa Gateway Area based on both the macroeconomic and microeconomic conclusions previously presented. Ultimately, the economic review of the area’s potential did not match with the forecast for growth as determined by the Maricopa Association of Governments (MAG). For this reason, alternative growth scenarios were produced for the City’s consideration.
Instead of a declining capture rate of industrial and office employment through 2030 as projected by MAG, the scenario’s forecast a growing share as shown on the following chart.
Alternate Employment Growth Scenarios Projected Southeast Valley Capture of Maricopa County Office & Industrial Employment Growth 2005 - 2030 Sources: MAG 2007, Elliott D. Pollack & Co. 50.0%
45.0% 45.0% Scenario 2
40.0% 40.0% 40.0% 37.0% 35.3% Scenario 1 35.0% 34.6%
30.0%
MAG Projection 25.0%
23.8% 20.0%
15.0%
10.0% 2005-2010 2010-2020 2020-2030 Baseline Case Scenario 1 Scenario 2
Scenario 1 grows the share of industrial and office employment in the Southeast Valley to 40% by 2030; Scenario 2 grows that share to 45%. Though not shown on the chart, Mesa’s share of the Southeast Valley employment market is increased to over 50% by 2030.
The following chart shows the resulting jobs to population ratio for Mesa based on the growth assumptions outlined above. Through 2010, MAG’s forecast appears reasonable. However, between 2010 and 2020, the jobs to population ratios for the two scenarios begin to increase above MAG estimates. Between 2020 and 2030, the Mesa Gateway Area is expected to realize larger employment increases as it begins to capture a larger share of the market.
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Projected Jobs To Population Ratio City of Mesa Sources: MAG 2007, Elliott D. Pollack & Co.
0.70
0.60 0.60 0.58
0.53 0.52 0.49 0.50 0.50
0.43 0.43 0.43
0.40 0.36 0.36 0.36
0.30
0.20
0.10
- MAG Scenario 1 Scenario 2 2005 2010 2020 2030
Based on typical floor area ratios, if all the jobs cited in the scenarios occurred within MGA, the additional land demand in MGA would increase between 860 and 1,488 acres. So even with some aggressive estimates of employment growth and capture rates for Mesa, there would still be a large supply of employment land available for future development in the Mesa Gateway Area. Based on the calculation below, that excess inventory totals more than 11,000 acres of employment and office land.
Estimated 2030 Employment Land Demand (Acres) Vs. Mesa General Land Use Acreage Mesa Gateway Area
Scenario 2 MAG Additional Land Total Land Current Job Type Forecast Demand Demand Land Use Plan Surplus/(Deficit) Retail 631 - 631 774 143 Office 418 857 1,274 254 (1,021) Industrial* 713 631 1,345 13,324 11,979 Total 1,762 1,488 3,251 14,352 11,101
*Industrial includes Mixed-Use Employment, Business Park, Light Industrial, General Industrial categories.
Sources: MAG 2007, City of Mesa
Concluding Remarks
Based on the accompanying review of regional and local economic conditions, the Phoenix-Mesa Gateway Airport area has a very favorably economic outlook. However, City planners and administrators need to keep in mind that the City of Mesa is part of a larger economic region. Thus, the area will be impacted by activity that occurs within the broader region. In addition, the economic development status of the property will be weaker during the next decade than in following decades. The costs and benefits of providing incentives must be weighed and a plan must be formulated. The primary development risks associated with the area include: 1) the existence of many other
vii Task 2d: Current Trends Economic Base Memorandum competitor sites throughout the Valley, 2) the current lack of critical mass at the site, and 3) the current lack of quality branding at the site. In the longer term, the area will offer a distinct competitive advantage and, with proper planning, should realize healthy growth for many years.
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1.0 Introduction
1.1 Purpose of Study
Elliott D. Pollack & Company has been retained to provide an economic evaluation of the development potential of the area surrounding Phoenix-Mesa Gateway Airport in Mesa, Arizona. Two study areas surrounding the airport are identified on the following map. The larger area has been denoted as the Transportation Planning Study Area encompasses the Land Use Evaluation Area and includes an area north of the US-60, with Southern Avenue as its northern border. From Southern Avenue to Baseline Road, the area is confined to Higley Road on the West to Meridian Drive on the East. South of Baseline Road, the western border contracts to Power Road. This larger area’s southern border is Germann Road. Both areas identified on the map cumulatively make up the Transportation Planning Study Area.
Map 1-1
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The smaller area is known as the Land Use Evaluation Area, and includes under- and undeveloped land as well as Phoenix-Mesa Gateway Airport. There are parts of unincorporated Maricopa County within this region, as well as the existing site of the GM Proving Grounds and parcels of agricultural use. Arizona State University’s Polytechnic campus is located within the boundaries of the Airport. This area is almost rectangular in shape, with the half mile between Guadalupe Road and Elliot Road as its northern border, Germann Road to the south, Power Road on the west, and Signal Butte Road on the east running from the northern border to halfway between Ray Road and Williams Field Road. The eastern border then becomes Meridian Drive until it reaches Germann Road at the southern border. The Land Use Evaluation Area is the primary focus of this analysis.
The map on the following page shows existing and future land use according to the City of Mesa General Plan. Within the Land Use Evaluation Area of the Mesa Gateway Area, the following acreages by land use have been provided by the City of Mesa Planning Department.
Table 1-1 SE Mesa Strategic Development Plan Land Use Distribution Land Use Evaluation Area
Land Use Land Use Description Acres LDR 0-1 Low Density Residential 59 LDR1-2 Low Density Residential 318 MDR2-4 Medium Density Residential - MDR 4-6 Medium Density Residential 1,973 MDR 6-10 Medium Density Residential - HDR 10-15 High Density Residential - HDR 15+ High Density Residential - MUR Mixed Use/Residential 201 RC Regional Commercial 450 CC Community Commercial 297 NC Neighborhood Commercial 28 O Office 254 MUE Mixed Use /Employment 3,728 BP Business Park 1,625 LI Light Indsutrial 4,082 GI General Industrial 3,890 PSP Public/Semi-public 1,732 S Education 626 OS Open Space - PParks - Total 19,260
Source: City of Mesa
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Map 1-2
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This study begins with a current assessment of the overall commercial real estate market in Metro Phoenix. The study evaluates recently released projections from the Maricopa Association of Governments, then develops alternate scenarios of growth in the Southeast Valley and, more specifically, to the market area surrounding Phoenix-Mesa Gateway Airport.
In order to gauge development potential within the airport market area, a competitive analysis was conducted. This included a review of the economic characteristics of the Mesa Gateway Area along with similar analyses of various alternative employment centers throughout the Valley. The competitive analysis also includes a review of the long term potential of various industries that may be targeted for location in the area.
Throughout this study, the term Mesa Gateway Area (MGA) will refer to the Land Use Evaluation Area described above. It does not and is not intended to refer to Phoenix- Mesa Gateway Airport. The focus of this analysis is on the land area surrounding the airport, recognizing the assets that the airport and its occupants bring to the surrounding community. The report does not particularly focus on the airport operations, facilities or plans.
1.2 Report Profile
The report is segmented into two distinct chapters. Chapter 1 (Sections 2.0, 3.0, 4.0, and 5.0) addresses the long and short term economic development potential of the Greater Phoenix area. This portion of the report also provides a macroeconomic analysis of the retail, office, and industrial markets. Chapter 2 utilizes the information contained in Chapter 1 along with research into airport-specific development potential and a review of the growth potential of select industries that may be targeted for location at the subject site.
1.3 Limiting Conditions
This study prepared by Elliott D. Pollack & Company is subject to the following considerations and limiting conditions.
• The reported recommendation(s) represent the considered judgment of Elliott D. Pollack and Company based on the facts, analyses and methodologies described in the report.
• Except as specifically stated to the contrary, this study will not give consideration to the following matters to the extent they exist: (i) matters of a legal nature, including issues of legal title and compliance with federal, state and local laws and ordinances; and (ii) environmental and engineering issues, and the costs associated with their correction.
• This market study is intended to be read and used as a whole and not in parts.
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• The analysis is based on currently available information and estimates and assumptions about long-term future development trends. Such estimates and assumptions are subject to uncertainty and variation. Accordingly, we do not represent them as results that will be achieved. Some assumptions inevitably will not materialize and unanticipated events and circumstances may occur; therefore, the actual results achieved may vary materially from the forecasted results. The assumptions disclosed in this market study are those that are believed to be significant to the projections of future results.
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2.0 Regional Demographics and Economic Outlook
This section specifically addresses Greater Phoenix’s long term economic potential. This is highly relevant since the development of Phoenix-Mesa Gateway Airport and the surrounding areas will occur over multiple decades.
2.1 Greater Phoenix Economic Potential
The current economic profiles of East Mesa and Pinal County are changing. While a presentation of current conditions is generally useful, the demand for residential products in the area is primarily a function of growth in the Greater Phoenix area. As the local markets develop, they will begin to take on the economic characteristics of the broader region, with some exceptions that are based on each local community’s economic potential. To fully understand the broader market’s economic dynamics, a review of Greater Phoenix’s history is warranted.
Historical Context Greater Phoenix was a well-established growth area for virtually the entire twentieth century. This trend continued into the twenty-first century. For some historical perspective, from 1950 to 2005, the Greater Phoenix population grew by 939.0% while the United States population grew by 95.0%. More recently, over the last decade, the Greater Phoenix population grew by 47.0% compared to 11.1% for the United States as a whole.
In terms of employment specifics, Greater Phoenix grew by 2,302.0% from 1950 to 2005 while the United States as a whole grew by approximately 195.0%. Local population growth has historically been fairly stable, exceeding 3.0% every year since 1992. Local employment growth, which tends to be more cyclical, can realize no growth in times of recession but can exceed 6.0% or more in times of expansion.
There are 28 major employment markets in the country. A major employment market has more than a million jobs. Greater Phoenix was the fastest growing major employment market in both 2005 and 2006 in terms of percentage growth. Moving forward, the long term forecast for employment growth is favorable. Estimates from virtually all private and public sources suggest that Arizona will be the second most rapidly growing state in the country over the next 25 years in percentage terms. Greater Phoenix will lead this growth.
For an alternative perspective, in 2006, about 1 in every 30 new U.S. jobs was created in Greater Phoenix. This is impressive given that Greater Phoenix’s employment base in 2006 represented about 1 out of 70 U.S. jobs.
This impressive growth also occurred at the state level. For decades, Arizona has been one of the most rapidly growing states in the Country in terms of population, employment, and personal income. Only two states have been in the top five in terms of
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these important growth measures every decade since the end of World War II, those being Arizona and Nevada.
Over the last five years, the Phoenix metropolitan area has accounted for almost 73% of the state’s 985,400 additional residents and about 79% of the state’s employment growth of 378,600 jobs. In 2000, the Greater Phoenix area was the 14th largest metropolitan area in the United States in terms of population count, up from 19th largest ten years earlier. The entire state of Arizona has enjoyed consistent growth in population as well. The Arizona Department of Economic Security estimates the 2006 Arizona population to be 6.31 million people, nearly twice the population of 20 years ago.
Economic Fundamentals Both people and employers vote with their feet and, for decades, they have voted for Greater Phoenix. There are numerous reasons why one area of the country outperforms others. Some reasons are more quantitative while others are qualitative.
In terms of qualitative factors, Greater Phoenix is a desirable place to work, to live, and to raise a family. The southwestern lifestyle is very attractive to many individuals. Housing development in the region is generally of a lower density which is typically favored. The climate is conducive to outdoor recreation. While often overlooked, Greater Phoenix also tends to afford opportunities for success. The social infrastructure generally allows someone to be judged based on his or her contribution to the community rather than longevity in the community or family status.
Similarly, there are quantitative reasons why Greater Phoenix grows. These include items such as tax rates, workforce cost and availability, proximity to major transportation networks, and even days of sunshine. One important quantitative measure that has received recent attention is housing affordability. While housing prices increased rapidly from early 2004 through mid-2005, the median housing price remains low relative to many other western cities. Phoenix is now more expensive than Denver, Salt Lake City, and major cities in Texas. However, it is still quite affordable compared to virtually any California city, as well as cities such as Seattle and Las Vegas. It appears that while prices have increased, the local economy remains competitive. The median existing housing price in Greater Phoenix at the end of 2006 was $262,200 and has risen to $264,800 through the second quarter of 2007 according to the National Association of Realtors. Of note is the fact that existing housing prices in Greater Phoenix have been essentially flat since July 2005.
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Chart 2-1
Greater Phoenix Median Price of Resale Housing (000's) January 2002 - July 2007 Source: Arizona Multiple Listing Service
$280
$260
$240
$220
$200
$180
$160
$140
$120
$100
2 2 3 3 4 4 5 5 6 6 7 7 0 -0 02 0 -0 03 0 -0 04 0 -0 -0 -0 n- l t- n- r-03 l t- r-04 l t- r-05 t-0 r-06 t-0 Ja Apr-02 Ju Oc Ja Ap Ju Oc Jan- Ap Ju Oc Jan- Ap Jul-05 Oc Jan-06 Ap Jul Oc Jan-07 Apr Jul
Consideration could be given to the remaining dozens of reasons why a place grows and maintains economic prosperity. However, this discussion can be significantly simplified. There are two basic questions one has to ask to determine why a place grows. First, it is important to ask if a community is “likeable” in terms of lifestyle, affordability, and overall desirability. In other words, do people broadly like a particular place? Based on population flows, people like Greater Phoenix. Population flows continue to be strong. Indeed, all projections suggest that population growth is going to continue at a rapid pace through at least 2030.
It is also important to ask if the local government has a pro-growth attitude. Greater Phoenix tends to be pro-growth. Historically, the State and local governments have realized that they must allow the private sector to function if jobs are to be created to support the population inflows. This philosophy continues today. As a result, taxes have been relatively low, bureaucracy is relatively limited, and the business environment is conducive to companies expanding or opening. Clearly, the economic foundation of Greater Phoenix is strong. This should facilitate long-term growth.
The Current Business Cycle Similar to virtually every other metro area in the country, Greater Phoenix employment growth tends to be cyclical. However, during periods of national recession, local employment growth tends to decline very modestly compared to the U.S. as a whole. Furthermore, it grows much more rapidly than the nation during periods of expansion. Growth also tends to peak well before the end of the business cycle. We expect this
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pattern to continue. Greater Phoenix also tends to do considerably better than most individual metropolitan areas. This has been the case in the present cycle as well.
The comparison with the U.S. as a whole is even more impressive when directly comparing rates of growth over multiple decades. Historically, in each decade since 1960, employment growth in the Greater Phoenix area has exceeded that of the U.S. by a factor of about 2.5. From 2000 to 2006, local employment growth exceeded that of the nation by a factor of 5.6. This is because U.S. employment growth has been less than the historical norm during this cycle while Greater Phoenix has continued to grow rapidly.
Local Employment Conditions A strong economy will produce jobs in multiple sectors. The Greater Phoenix area indeed has a very large and diverse economy that supports broad-based job growth.
A major component of the local economy is the high-tech sector. “High-tech” operations primarily include computer chip and aerospace manufacturers. About 40% of manufacturing jobs in Greater Phoenix are in high-tech operations, compared to just under 13% nationally. Manufacturing growth in Greater Phoenix has been more anemic in this cycle than in the past mainly due to slower domestic employment growth by chip manufacturers. The Greater Phoenix economic base also includes advanced business services, transportation and distribution, wholesale trade, tourism, and the retirement and second home markets.
Rapid employment growth is being experienced across the board. Of the 106,900 jobs created in Greater Phoenix in 2006, 20,900 were in construction, 15,700 were in trade, and 23,800 were in professional and business services, to name the top three employment generating industries for the year. Education and health services and leisure and hospitality services were the other two industries posting job growth in excess of 10,000 workers.
Housing Housing here, as well as nationally, is going through a correction. It appears that as many as 20,000 excess housing units were built in 2004 and 2005 due to a relatively large number of investors entering the market, among other things. In 2004, 60,872 housing permits were issued in Greater Phoenix. The number climbed further in 2005 with a total of 63,570 permits being issued. However, in 2006, permits declined by 33.3%, to 42,423. Interestingly, 2006 still represented the 4th best year on record for permit issuance. The population inflows at the time suggested an underlying demand for new housing equal to about 40,000 to 45,000 single family units per year. Thus, it is clear that significant overbuilding occurred.
Like any manufacturing that is overproduced, the single-family housing market has to go through a period when it under-produces and reduces prices. This will enable homebuilders to work off the excess inventory. The housing market is in the middle of such a correction now.
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The good news is that communities that continue to grow will be in a better position to work off the excess inventory in a reasonable amount of time. Greater Phoenix is such a community.
Partially offsetting the slowdown in the single family housing market is the fact that the local commercial markets remain very strong. Low vacancy rates in the multi-family, office, retail, and industrial markets, combined with continued strong job growth and population flows, should keep commercial construction strong in 2007 and 2008. Yet, this strength in commercial and industrial construction will probably not be enough to alleviate the job losses that are likely to occur in the single family construction market in the short-term.
Overall, while progress was made toward working off excess housing units from October 2006 through March 2007, since then permits are near the demographic demand. According to R.L. Brown, permitting figures for the first seven months of 2007 show that Greater Phoenix is on pace to issue nearly 40,000 permits, with a projected annualized total of 39,809. Indeed, listings in the local MLS exceed 52,000, well above the normal level of 30,000. The supply of existing housing now exceeds eleven months, which is well above the norm of three to four months. Homebuilders anecdotally report excess spec inventory. Thus, much of the correction still lies in front of us at the present time.
Short-Term Economic Forecast A slower rate of growth is projected for employment in 2007 and 2008 by the Greater Phoenix Blue Chip panel (a panel of 12 local economists), largely because the current economic expansion is nearing conclusion. Sometime during the next five years employment will likely slow to near zero growth for several months before picking up speed again at the beginning of the next expansion period. The following page includes an employment history and forecast chart to illustrate this point. The exact timing of the next recession is impossible to predict. Based on current conditions, the most likely scenario calls for a recession in 2009 or later. Again, this will be short lived and Greater Phoenix will still outperform most peer metro areas during this period of transition.
Overall, virtually all projections suggest that Greater Phoenix will continue to do well relative to other metro areas during the next five years and beyond. There is nothing to suggest that the underlying dynamics of the Greater Phoenix economy have changed significantly, nor are they likely to change in coming years. The long-term outlook remains excellent.
Long Term Economic Forecast The forecast from the University of Arizona Forecasting Project is for Metro Phoenix to average approximately 56,400 building permits annually between 2006 and 2015. See chart on following page. Approximately 91% of those permits are projected to be in the single-family category. Metro Phoenix is projected to grow over that same time span by 1.4 million people or approximately 130,000 persons per year according to an average of multiple sources. As illustrated below, employment is expected to grow significantly as well, increasing by 642,000 jobs by 2015 or an average of 64,000 jobs per year.
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Chart 2-2
Forecasted Annual Population and Employment Growth Metro Phoenix Source: Univ. of Arizona
180.0
160.0 154.8 156.8 148.7 143.1 140.5 140.0 137.8 140.0 132.7 123.1 125.3 120.0
100.0 97.4
77.7 80.0 73.3 Thousands 66.6 62.4 61.7 60.7 57.9 60.0 46.7 46.7
40.0
20.0
- 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Population Growth Employment Growth
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Chart 2-3
Housing Permit Forecast Metro Phoenix Source: Univ. of Arizona
70
60.2 60 57.0 54.0 51.5 51.2 52.0 50.2 50 48.2 45.2 45.7
40
30 Permits (1000s) Permits
20
10 5.2 5.4 5.5 5.7 4.4 4.0 4.4 4.8 4.8 4.9
0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Single-Family Multi-Family
2.2 Analysis of MAG Forecast For Mesa
The Maricopa Association of Governments (MAG) periodically provides population forecasts for Maricopa County and its incorporated cities. The overall county-wide forecast is consistent with long-term DES projections. MAG forecasts the growth of individual cities based on historic growth trends, available vacant land, and other factors that influence the direction of growth. The following table shows the current 2007 forecast from MAG based on the 2005 U.S. Census. Overall, the County is expected to grow from approximately 3.68 million persons in 2005 to 6.14 million persons in 2030, an increase of nearly 67% over 25 years. The employment forecast shows that the County is expected to grow from 1.7 million jobs in 2005 to nearly 3.4 million jobs in 2030; representing a 93% increase. Consistent with expectations, some of the future population growth will continue to spill into adjacent Pinal County, but employment will still largely be contained within Maricopa County.
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Table 2-1
MAG Forecast Maricopa County
POPULATION EMPLOYMENT Community 2005 2010 2020 2030 2005 2010 2020 2030 Avondale 70,160 83,856 105,989 123,265 12,315 20,599 37,776 53,083 Buckeye 32,735 74,906 218,591 419,146 8,672 22,400 57,297 147,851 Carefree 3,654 4,418 5,816 6,097 2,669 3,270 3,992 4,329 Cave Creek 4,845 5,781 7,815 9,656 2,602 3,564 4,666 6,066 Chandler 236,073 265,107 282,991 283,792 86,732 128,244 168,141 178,116 County Areas 80,661 87,434 107,441 159,312 24,051 27,353 39,281 70,428 El Mirage 31,935 34,819 38,620 38,717 2,858 5,001 9,276 11,528 Fort McDowell Yavapai Nation 824 839 1,037 1,239 1,228 1,323 1,647 1,959 Fountain Hills 24,347 27,166 33,331 33,810 7,492 9,954 11,569 11,573 Gila Bend 2,118 2,575 3,950 9,074 1,077 1,691 2,760 6,824 Gila River Indian Community 2,742 2,790 2,941 3,410 4,334 5,422 7,612 14,448 Gilbert 178,708 218,009 285,819 300,295 56,292 81,852 117,984 128,792 Glendale 257,891 279,807 315,055 322,062 88,172 117,110 156,508 171,498 Goodyear 47,520 71,354 174,521 299,397 15,794 28,167 73,622 130,336 Guadalupe 5,555 5,790 5,982 5,983 1,033 1,387 1,467 1,481 Litchfield Park 6,787 8,587 10,305 10,510 1,710 2,405 3,200 4,280 Mesa 486,296 518,944 565,693 584,866 174,909 218,085 275,236 306,030 Paradise Valley 14,136 14,790 15,224 15,352 5,769 6,717 7,707 8,734 Peoria 141,441 172,793 236,154 306,070 34,631 53,397 87,968 117,861 Phoenix 1,510,177 1,695,549 1,990,450 2,201,843 811,513 937,182 1,108,031 1,246,527 Queen Creek 19,879 34,506 55,529 72,947 4,021 9,652 22,213 35,145 Salt River Pima Maricopa Indian Community 6,822 7,087 7,308 7,425 5,977 11,131 25,587 49,905 Scottsdale 234,515 249,341 269,266 286,020 181,652 208,073 232,832 252,015 Surprise 93,356 146,890 268,359 401,458 16,289 31,105 81,423 147,703 Tempe 165,740 177,771 191,881 197,970 176,688 198,243 219,543 235,616 Tolleson 6,491 7,748 9,646 10,193 12,340 15,808 19,854 22,314 Wickenburg 9,606 11,022 13,311 17,732 5,055 6,622 8,921 12,316 Youngtown 6,011 6,820 7,275 7,359 1,657 1,667 1,988 2,042 Grand Total 3,681,025 4,216,499 5,230,300 6,135,000 1,747,532 2,157,424 2,788,101 3,378,800 Percent Increase From 2005 66.7% 93.3%
Source: MAG 2007
The above table also shows that Mesa is expected to grow from 486,000 persons in 2005 to 585,000 persons in 2030. Its employment base is expected to increase as well from 175,000 to 306,000 jobs in 2030.
An important indicator of the health of a community is its jobs to population ratio. The current estimate of jobs per person in Maricopa County is approximately 0.50 or stated another way, one job for every two people. Those communities with jobs to population ratios above the county average tend to have stronger local economies. Fast growing communities on the periphery of the metro area typically have lower jobs to population ratios since job growth lags behind population growth. Over time, however, those communities will see jobs eventually follow residents to the peripheral areas, especially retail jobs.
Eventually, the Phoenix-Mesa Gateway Airport area will serve as an employment hub for much of the far East Valley. Employees will reside both in Mesa and in other parts of the region. In the future, this will result in a jobs to population ratio in excess of the regional average (see below). The extent that this ratio increases over time will depend on the WGA’s ability to capture jobs relative to other competing areas in Metro Phoenix, the extent that it is planned properly, and the extent that it develops a quality brand image. Additional strategies pertaining to product positioning will be provided in a later memorandum.
For some regional perspective, the following chart shows the forecast of jobs to population for the largest communities in Maricopa County. Three communities where large employment centers are located have high ratios, including Phoenix, Scottsdale and
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Tempe. In 2005, most other cities were much lower, in the 0.30 to 0.40 range; including Mesa which in 2005 had an estimated 0.38 jobs to population ratio. Based on MAG’s forecast, Mesa is expected to increase its ratio to approximately the county wide average by 2030. Other cities such as Glendale and Chandler are also expected to equal or exceed the county average. Tempe has the highest ratio among all communities, primarily because it is landlocked and has little room for additional residential development. However, there are extensive employment opportunities in Tempe including the downtown area, Tempe Town Lake and south Tempe where vacant employment land still exists.
Chart 2-4
Forecasted Jobs To Population Ratio Selected Cities Source: MAG 2007
1.40 1.28 1.22 1.18 1.20 1.11
1.00 0.89 0.87 0.84 0.78 0.80
0.63 0.58 0.60 0.57 0.56 0.56 0.60 0.54 0.53 0.54 0.55 0.52 0.49 0.50 0.49 0.48 0.43 0.41 0.42 0.43 0.39 0.37 0.38 0.38 0.37 0.40 0.35 0.36 0.32 0.31 0.30 0.25 0.21 0.20 0.18
- Chandler Gilbert Glendale Mesa Peoria Phoenix Scottsdale Surprise Tempe County
2005 2010 2020 2030
In order to give some scale to the Mesa employment ratio relative to the Maricopa County economy, in 2005 the city accounted for approximately 13.2% of the population but only 10.0% of county jobs. By 2030, Mesa is expected to account for approximately 9.5% of the county’s population and 9.0% of county jobs. Therefore, even though Mesa will continue to grow, its proportion of the total county population will decrease. Likewise, its percentage of total county jobs will also decrease but become more consistent with its population base.
The following three charts show the projected capture rates for employment by the various cities in Maricopa County over the next 25 years. The chart shows that cities that are heavily populated today have declining capture rates while newly developing cities, such as Buckeye, Goodyear, Peoria, and Surprise, will have increasing capture rates. For the near future, Mesa is expected to capture approximately 10% of all employment in
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Maricopa County through 2010. Over the next decade, its capture rate declines slightly and then between 2020 and 2030, it is expected to decline to a 5% rate. Among the more heavily developed cities in Maricopa County, Mesa actually has one of the higher capture rates, excluding the City of Phoenix.
The projected capture rates for industrial employment and office employment are shown on the following pages. The same pattern as described previously emerges from this data showing that the newly growing peripheral cities have higher capture rates towards the latter end of the forecast. Mesa is expected to have one of the higher capture rates of industrial employment in the 2010 to 2020 decade.
Chart 2-5
Projected Employment Capture Rates Maricopa County Source: MAG 2007
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0% Buckeye Chandler Gilbert Glendale Goodyear Mesa Peoria Phoenix Scottsdale Surprise Tempe
2005-2010 2010-2020 2020-2030
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Chart 2-6
Projected Industrial Employment Capture Rates Maricopa County Source: MAG 2007
40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0% Buckeye Chandler Gilbert Glendale Goodyear Mesa Peoria Phoenix Scottsdale Surprise Tempe
2005-2010 2010-2020 2020-2030
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Chart 2-7
Projected Office Employment Capture Rates Maricopa County Source: MAG 2007
40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0% Buckeye Chandler Gilbert Glendale Goodyear Mesa Peoria Phoenix Scottsdale Surprise Tempe
2005-2010 2010-2020 2020-2030
In terms of office employment, Mesa is also expected to have one of the higher capture rates among all the selected communities. In fact, Mesa’s capture rate increases over time, indicating that it could become a center of office employment beyond what has happened in the past. As will be noted in a later section, office development is one of the last real estate sectors to enter a newly growing area. For the most part, office development is found in major clusters throughout the Valley based on the availability of transportation and amenities for office workers. Today, some of the most important office clusters include 24th Street and Camelback in Phoenix, the Scottsdale Airpark in Scottsdale, downtown and midtown Phoenix, and Deer Valley near the I-17/101 interchange.
Some additional analysis was conducted of the MAG projections for the Southeast Valley of Maricopa County. This area includes the communities of Tempe, Guadalupe, Mesa, Gilbert, and Chandler. The following chart shows the capture rates for population and employment for the Southeast Valley through 2030. The assumptions behind this forecast suggest that the Southeast Valley will begin to build out due to a shortage of vacant available land for residential development in the 2010 to 2020 decade. Again, this is for residential development in Maricopa County and not Pinal County. For instance, between 2005 and 2010, approximately 21% of the county’s population growth is expected to occur in the Southeast Valley. This declines to 14.5% in the next decade, followed by only a 4.5% increase in the 2020 to 2030 time frame. Employment growth follows a similar pattern of decline.
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Chart 2-8
Forecasted Southeast Valley Capture of Maricopa County Population and Employment Growth 2005 - 2030 Source:MAG 2007 35.0% 32.2%
30.0%
24.5% 25.0%
21.1% Employment
20.0%
14.5% 15.0% 11.5% Population 10.0%
4.5% 5.0%
0.0% 2005-2010 2010-2020 2020-2030
Employment Population
However, in reviewing the population and employment projections, it appears that MAG may have underestimated the employment potential in the Southeast Valley and the amount of vacant land that is available in various areas, including Mesa Gateway Area, to continue to accommodate employment. In addition, there are many opportunities over the next 25 years for redevelopment of older parts of Tempe and Mesa that are today occupied by obsolete buildings. This could result in the intensification of employment in the older communities closer to the surrounding labor base rather than seeing job growth on the periphery of the metro area.
The following chart shows the capture rate of the Southeast Valley for the county’s office and industrial employment over the next 25 years. The capture rate for industrial employment is expected to decline dramatically in 2020 to 2030 timeframe. Office employment is more stable through 2020, but then declines as well in the following decade. Once again, this forecast does not recognize the potential for redevelopment of older areas or for the Mesa Gateway Area to capture a large percentage of the employment growth. The MAG forecast instead assumes that communities such as Goodyear, Buckeye, and Surprise will capture a growing share of the office market.
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Chart 2-9
Forecasted Southeast Valley Capture of Maricopa County Office & Industrial Employment Growth 2005 - 2030 Source: MAG 2007 40.0%
36.0% 35.3% 35.0% 35.3% Office
32.0% 30.0% Industrial
25.5% 25.0%
20.0% 19.8%
15.0%
10.0% 2005-2010 2010-2020 2020-2030
Office Employment Industrial Employment
In a later section of this report, alternate growth scenarios will be introduced to show the potential of Mesa to capture a greater share of employment growth than is projected to occur in the West Valley or Pinal County.
2.3 MAG Forecast For Mesa Gateway Area
The MAG projections were also analyzed with respect to the Mesa Gateway Area. The following tables show the overall Mesa population and employment forecast though 2030 compared to the forecast for the Mesa Gateway Area. The boundaries of the MGA are slightly different than the analysis zones used by MAG. However, the data presented in the table represents the far southeast portion of Mesa south of Baseline Road. This area comprises most of the MGA study area.
According to MAG, the Mesa Gateway Area will account for a large percentage of Mesa’s growth, particularly starting in the next decade. MGA will also account for future job growth over the next 20-plus years.
In 2005, Mesa had approximately 175,000 jobs. That job base is expected to grow to 306,000 jobs by 2030. For the Mesa Gateway Area, there were approximately 8,000 jobs in the area in 2005. By 2030, employment should increase to close to 56,000 jobs. In the next two decades, between 2010 and 2030, MAG forecasts that the Mesa Gateway Area will account for approximately 50% of all job growth in the City. However, as was noted on the table, between 2020 and 2030, MAG forecasts that the increase in jobs will decline
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relative to the prior decade. With the vast amount of employment land available around Phoenix-Mesa Gateway Airport, it is questionable whether this decline would occur given MGA’s location, the airport asset, and projected transportation infrastructure.
Table 2-2
Mesa Vs. Mesa Gateway Area (MGA) Population Growth Forecast Land Use Evaluation Area
2006 2010 2020 2030 Mesa Population Forecast* 491,150 518,944 565,693 584,866 Increase 32,648 46,749 19,173
MGA Population Forecast* 2,625 4,237 14,024 24,837 Increase 6,496 19,970 12,187
MGA as % of Mesa Population Growth 19.9% 42.7% 63.6%
*Data in each year represents total population estimate.
Sources: MAG 2007, Transportation Existing Conditions Report
Table 2-3
Mesa Vs. MGA Employment Growth Forecast Land Use Evaluation Area
2006 2010 2020 2030 Mesa Employment Forecast* 182,799 218,085 275,236 306,030 Increase 43,176 57,151 30,794
MGA Employment Forecast* 2,717 5,242 27,095 48,388 Increase 3,966 27,545 16,168
MGA as % of Mesa Employment Growth 9.2% 48.2% 52.5%
*Data in each year represents total employment estimate.
Sources: MAG 2007, Transportation Existing Conditions Report
The following table shows the employment growth forecast for the Mesa Gateway Area by job type. Retail jobs are expected to grow rapidly through 2020 and then grow slowly for the following decade. By comparison, both office and industrial employment are expected to grow slowly through 2010 then accelerate thereafter. The “public” and “other” job categories are expected to grow slowly with the “other” category actually experiencing a loss of employment in the last decade of the study period.
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Table 2-4
MGA Employment Growth Forecast By Job Type
Job Type 2006 2010 2020 2030 Retail 93 352 3,832 5,303 Office 453 1,567 9,599 16,945 Industrial 1,183 2,613 10,681 22,116 Public 122 310 1,124 1,850 Other 866 399 1,859 2,175 Total 2,717 5,242 27,095 48,388
*Data in each year represents total employment estimate.
Sources: MAG 2003 and 2007 Forecasts, Transportation Existing Conditions Report
The estimated demand for land in the Mesa Gateway Area for employment uses is presented in the following table. Using MAG standards for floor area ratios and square footage of building space for each employee, the overall demand for land is approximately 2,000 acres. Approximately 35% of those acres would be devoted to industrial uses and 21% to office uses.
Table 2-5
Estimated Employment Land Demand In Acres* Mesa Gateway Area By Job Type
Job Type 2005 2010 2020 2030 Retail 11 42 456 631 Office 11 39 237 418 Industrial 38 84 345 713 Public 7 17 61 100 Other 74 30 140 164 Total 141 212 1,238 2,027
*Data in each year represents total employment acreage estimate.
Source: MAG 2007
Overall, the demand for employment land pales in comparison to the amount of land available for development in the MGA. Based on current land use acreage provided by the City of Mesa for the Land Use Evaluation Study Area, there is a substantial supply of vacant land that would be available for employment uses beyond the 2030 timeline of the MAG projections. The following table compares the 2030 employment land demand for retail, office and industrial uses to the current General Plan Land Use. The Plan shows more than 14,000 acres available compared to the demand of less than 1,800 acres. While there is a deficit of 164 acres in the office category, office uses can locate within the retail and employment categories.
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Estimated MAG 2030 Employment Land Demand (Acres) Vs. Mesa General Land Use Acreage Mesa Gateway Area
MAG Current Job Type Forecast Land Use Plan Surplus/(Deficit) Retail 631 774 143 Office 418 254 (164) Industrial* 713 13,324 12,611 Total 1,762 14,352 12,590
*Industrial includes Mixed-Use Employment, Business Park, Light Industrial, General Industrial categories.
Sources: MAG 2007, City of Mesa
Mesa Gateway Area’s assets of the airport and important vehicular transportation corridors will likely attract a greater proportion of employment generation than presented in the MAG projections. Analysis of the MAG projections indicate that they do not fully consider the Mesa Gateway Area’s capacity to capture a greater share of the region’s employment market in the future. This vacant land asset will assist the Southeast Valley in competing with other areas of metro Phoenix for job growth over the long term, particularly considering the airport asset.
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3.0 General Commercial Market Trends – Metro Phoenix
Because the Mesa Gateway Area and adjoining Pinal County are relatively young in terms of significant development, it will provide an interesting case study into how development progresses. First, housing development migrates into a newly developing area. This residential development results in demand for retail services. In parts of East Mesa, retail development has already occurred in earnest and will continue as long as the population grows. Later, as the population and labor force grows, other employment uses such as office and industrial businesses will migrate to the area.
Sequence of Development
Start Here
Residential Development
Demand for Employment Retail Demand
Labor Force
Overall, the Greater Phoenix commercial real estate sectors are experiencing unprecedented growth. For the past three years, abundant capital has been available for development and construction activity, especially in the Sun Belt states where population growth is evident. Much of the activity has been spurred by low interest rates that have driven down cap rates for all real estate sectors. Real estate is now viewed as a better investment than other instruments, including, until recently, the stock market. As a result, investors are willing to purchase real estate at lower cap rates in anticipation of rent increases and long term property appreciation.
The following tables compare cap rates for the various real estate sectors for 2001 and 2006. Cap rates are a measure comparing net operating income (NOI) for a real estate asset to its value. Essentially, it is a simple division of NOI by value. There is an inverse relationship between NOI and value: a lower cap rate produces a higher value.
The effect of lower cap rates on property values is shown on the following table. For every $1,000 of net operating income derived from a property, the value of that property varies according to the cap rate. For instance, an 8.6% cap rate produces a value of $11,600. Comparatively, a 6.3% cap rate produces $15,900 of value or 37% more
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property value for the same cash flow. As values rise, rents typically follow, assuming that the market is not oversupplied with excess building space.
Table 3-1
Effect of Lower Cap Rate on Building Value
Value For Each Cap Rate $1,000 NOI 8.6% $11,628
6.3% $15,873
Increase in Value 37.0%
Cap rates for most sectors are at historic lows ranging from 6.3% for apartments to 7.4% for industrial buildings. The effect of lower cap rates is higher property values. As will be seen in the following sections of this report, all real estate sectors have experienced strong increases in property values over the last three years. While this situation cannot last for much longer, it has driven rents to heights not yet experienced in Greater Phoenix.
Table 3-2: Cap Rates By Sector: 2001 Vs. 2006
Multi- CBD Suburban Retail Family Office Office Mall
2001 8.60% 9.20% 9.80% 8.90% 2006 6.30% 6.80% 7.30% 7.00%
Retail Industrial Industrial Neighborhood Retail Power Warehouse R&D 2001 9.50% 10.20% 9.10% 9.70%
2006 6.90% 7.00% 6.90% 7.40%
3.1 Retail Market Overview
At the end of 2006, the retail sector of the real estate market was comprised of approximately 115.3 million square feet of building space according to Arizona State University (these figures do not include freestanding retail buildings, hotels, car dealerships or shopping centers smaller than 20,000 square feet). Retail centers have experienced significant growth since 1982, increasing by 207% from a base of 37.5 million square feet. At the same time, Maricopa County’s population has increased by approximately 135% or 2.2 million people. Therefore, over that time frame, the per capita inventory of retail space increased from 23.6 square feet per person in 1982 to 30.2
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square feet per person in 2005. Since 1990, the retail inventory has hovered around the 30 square feet per person range.
Chart 3-1
Total Retail Inventory Per Person Metro Phoenix Centers Over 20,000 SF Source: Arizona Real Estate Center/ ASU, Arizona Department of Economic Security 34.00
32.00
30.00
28.00
26.00 Square Feet Per Person Per Feet Square 24.00
22.00
20.00 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Vacancy rates in the retail sector have declined slightly over the past few years from 5.3% in 2000 to 5.1% at the end of 2005 according to CB Richard Ellis. ASU reports a much higher vacancy rate of 8.9% for 2005, compared to 8.1% in 2000. The reason for this discrepancy between the two sources is unknown, but CB Richard Ellis is considered a more accurate source for vacancy data. The current vacancy rate according to CB Richard Ellis is 5.5%.
The demand for retail space created by strong population growth has maintained vacancy rates at moderate levels compared to other real estate sectors. In Maricopa County, as long as population growth and resident spending power persist, retail space will continue to be constructed.
Retail centers are generally classified into four categories.
• Strip/specialty centers are smaller retail centers that do not have an anchor store.
• Neighborhood centers are anchored by a grocer and possibly a drug store, and provide for the daily shopping needs of the population. Neighborhood centers
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contain about 40% of all the retail square footage in the metro area, although community/power centers have increased in importance over the last eight years.
• Community centers are anchored by at least one large discount store along with associated smaller shop space. Power centers, comprised of several discount anchor stores, are included in this category.
• Regional malls contain two or more full line department stores typically along with an enclosed shopping concourse.
The Maricopa County retail market is divided by type in the following table as of year- end 2006. Neighborhood centers contain most of the square footage followed by community centers. The vacancy rate for regional malls has declined in recent years as older centers have been repositioned in the marketplace. For instance, Chris-Town Mall, now known as the Spectrum Mall, was converted from a conventional mall to a discount power center with tenants such as Wal-Mart and Costco. Los Arcos Mall in Scottsdale was originally demolished for a hockey arena and retail development. The arena ultimately relocated to Glendale. Table 3-3 Components of Retail Sub-Market Metro Phoenix Retail Centers Over 20,000 SF 4th Quarter 2006
Percent of Total SF Type of Center Total SF Total SF Per Capita Regional 13,956,041 12.1% 3.7 Community 44,429,969 38.5% 11.7 Neighborhood 44,686,807 38.8% 11.8 Strip/Specialty 12,221,486 10.6% 3.2 Totals 115,294,303 100.0% 30.4
Source: DES, Arizona Real Estate Center, ASU, 4th Quarter, 2006 The average square feet of retail space per person currently stands at 30.4. However, wide differences in the amount of retail exist between different parts of the metro area. At the high end, the northeast part of the Valley has about 41.2 square feet per person while the Central Valley only has about 21.6 square feet per person. These differences exist because of the income levels of the residents, the density of development, and the out-of-town tourist trade, much of which is currently captured by Scottsdale and Phoenix.
The Northeast region, encompassing Northeast Phoenix and Scottsdale, has 36% more retail space per capita than the metro average. The Southeast Valley has 16% more retail space per capita than the average, but all other regions lag behind the county average. Price per square foot data is also displayed on the following page. The Southeast Valley
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could improve or expand its per capita retail inventory over time. Household incomes in parts of the Southeast Valley are well above the County average which will attract more retail uses. However, significant increases in the retail inventory will likely require an intensification of residential development to offset the low density found in the Southeast Valley suburbs..
Chart 3-2
Average Price Per Square Foot for Shopping Centers Metro Phoenix Source: Kammrath & Associates
$160.00 250 $147 $140 $140.00 $137 $127 200 $120.00 $102 $100.00 $96 $96 150 $83 $78 $80 $80.00 $71 $71 $67 $65 Price/ SF Price/ $61 $60 $58 $59 $56 100 No.Sales of $60.00 $51 $54
$40.00 $33 $33 50 $20.00
$0.00 0
7 8 3 4 8 9 4 5 * 89 95 00 01 06 7 1985 1986 198 198 19 1990 1991 1992 199 199 19 1996 1997 199 199 20 20 2002 2003 200 200 20 00 2
Price/ SF No. of Sales * Data through Q2 2007
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Table 3-4
Retail Building Space Per Capita - 2006 By Shopping Center Type and Region Metro Phoenix
Type of Retail Center Region Regional Community Neighborhood Strip/Specialty Total Northeast 5.3 16.8 13.4 5.7 41.2 Southeast 3.8 13.7 13.7 3.9 35.2 Southwest 2.0 9.3 10.3 0.9 22.6 Northwest 2.6 10.4 11.0 2.6 26.6 Central 5.4 6.1 8.1 2.0 21.6 Metro Phoenix 3.7 11.7 11.8 3.2 30.4
Sources: U.S. Census, AZ Dept. of Economic Security, ASU Real Estate Center
The above data is useful in evaluating the retail marketplace. However, another useful factor is the ratio of new retail building construction activity compared to the growth of Maricopa County. In other words, the true measure of retail activity is the number of square feet of retail space that has been constructed for each new person added to the County population. The following outlines that data by type of retail center for the period between 1987 and 2006.
The most dramatic increase in retail activity has occurred in the community center category due to the construction of power centers since the 1990s. In addition, some regional malls have been converted to the power center format as the demographics of Maricopa County have changed over time. Since 1987, 51.8% of all retail space built in the metro area has been in community centers, spurred by the popularity of discount department stores and other large users (Home Depot, Best Buy, etc.). Community and power centers are expected to continue to be a major focus of retail activity for the foreseeable future. The per capita inventory of regional malls in the Valley has declined in recent years. In the early 1990s, the inventory of regional malls stood at 6.0 square feet per person. Since that time, it has declined to 1.7 square feet per person as the tastes of the buying public have changed over time. Chandler Fashion Mall at Chandler Boulevard and the Loop 101 Freeway is the newest mall, completed at the end of 2001.
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Table 3-5 Construction of Retail Space Per Capita 1987-2006* Metro Phoenix Retail Centers Over 20,000 SF
Total SF Built % of Type of Center Total SF Built Per Capita* Inventory Built Regional 3,189,572 1.7 4.7% Community 35,324,434 18.5 51.8% Neighborhood 24,130,739 12.6 35.4% Strip/Specialty 5,607,973 2.9 8.2% Totals 68,252,718 35.7 100.0%
*Construction rate compared to new population added to metro area between 1987 and 2006.
Source: Phoenix Metropolitan Reports, AZ Real Estate Center, ASU
The following chart compares the inventory of retail space per person in 1986 to retail construction activity per new resident that occurred between 1987 and 2006. The neighborhood and specialty categories have maintained a fairly consistent construction pace. The community or power center category, however, has shown a significant increase in the past 18 years, growing from just 9.1 million square feet of space in 1986 to 40.9 million square feet in 2004. Community or power centers today comprise 37% of the market compared to 19% in 1986. This shift in shopping center retailing has been led primarily by large discount stores and others such as Home Depot, Lowe’s, and Best Buy. The pace of construction for regional malls has slowed in the past 15 years to 1.8 square feet per person compared to the 1986 inventory of 5.7 square feet per person. Part of the reason for such a drastic decline in the inventory is the repositioning of regional mall sites to power center or other uses and the rise in popularity of power retail centers.
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Chart 3-3
Retail Inventory Per Person 1986 vs. Retail SF Constructed 1987 - 2006 Source: Arizona Real Estate Center, ASU 20.0 18.5 18.0
16.0
14.0 12.6 12.0 10.9
10.0
8.0
Square Feet per Person 5.7 6.0 4.8
4.0 3.5 2.9 1.7 2.0
0.0 Regional Community Neighborhood Specialty 1986 Per Capita Inventory Total SF Built Per Capita
Site Location Criteria of Retailers The spatial distribution of community and neighborhood retail centers is typically driven by major anchor tenants. Whether local grocery companies or national department store chains, all retailers have certain standards or criteria for evaluating real estate sites. These companies consider the trade area’s population size, household incomes, resident education levels and similar criteria before committing to a site. This section will outline the criteria for some of the metro area’s major retailers and the manner in which they site stores locally.
Discount Department Stores Interviews with real estate representatives of the major discount department store chains indicate that they typically require a population of 125,000 to 150,000 persons within a three to five mile trade area surrounding a site. In a developing part of the metro area, this population threshold may represent the ultimate build-out population of the area. This equates to between 46,000 and 55,000 households based on the average of 2.7 persons per unit in Maricopa County. Median household incomes should ideally be in the range of above $45,000 to $50,000.
The typical spacing of stores in Maricopa County (within the same department store chain) is four to five miles based on current housing densities. These site selection criteria take into account competition from other discount retailers. A location on a major arterial is required; a freeway location is even more desirable.
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The per capita square footage of discount department store space in Maricopa County currently stands at 2.8. The distribution of stores is not equal, however, because of differences in income and density. The northwest and southeast parts of the Valley have the largest inventory of discount department store space while the southwest and central areas have the smallest. Across the Valley, there is one store for every 52,700 people, with several additional stores in the construction or planning stage.
Costco operates differently from the traditional discount retailers. Costco is more of a destination outlet that people will drive farther to visit. As a result, customers typically visit the warehouses less often, but make larger purchases. There are only ten Costco stores in Maricopa County or about one for every 330,000 people. Sales have been quoted at $1,000 per square foot in the typical Costco, about two to three times the rate of the major competing discount retailers.
The various chains also target different segments of the market. Wal-Mart has typically targeted middle-income families, but stores are found in all areas including upscale North Scottsdale. Target prefers to see a portion of the trade area population with incomes higher than $60,000 and a large percentage of college degrees. Target has developed a new store format aimed at this upper income segment called Target Greatland. These stores are about 40% larger than the typical Target, carry a wider variety of merchandise (but not groceries) and have a number of shopper-friendly features such as wider aisles.
The above site selection criteria have proven to be reliable in determining where the next power center might locate. As an area of the county reaches a critical population mass, these discount retailers are not far behind in purchasing independent sites or committing to purchase a site or lease a building from a retail developer within a power center
Grocery Stores While the number of power centers in Maricopa County has grown significantly over the past decade, the construction of grocery-anchored neighborhood centers has kept pace with population growth. Grocery stores need to be convenient to the consumer and are typically found on smaller sites, 10 to 15 acres in size, close to residential neighborhoods. However, grocery retailers, which historically operated on thin margins, are under siege from other retailers that now carry a full line of grocery items. These retailers include Wal-Mart, Target, Sam’s Club and Costco. As a result, the grocery industry in Maricopa County has undergone significant consolidation in the past decade and grocery retailers are much more cautious in the selection of a site for an outlet.
The spatial distribution of grocery stores is driven by the national grocery chains. Each company has certain standards or criteria for evaluating real estate sites. They consider the trade area’s population size, household incomes, resident education levels and similar criteria before committing to a site.
Because of their focus on convenience shopping, modern grocery retailers want to locate close to their customer base and are developing larger store formats that offer a wide array of non-grocery items in order to compete with Wal-Mart and Target. Most stores
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range in size from 45,000 to 65,000 square feet. However, some chains, such as Albertson’s and Fry’s, are now beginning to build 80,000 square foot combined grocery and pharmacy stores to capture a larger share of the market.
Across the Valley, there are 4.5 square feet of space for each person or about 12,600 persons per store. Just a few of years ago, the ratio was over 5.0 square feet of space for each person. With the elimination of several chains from the market, the ratio has dropped significantly. However, these figures do not include the Supercenters that have become a major force in the grocery business.
Retail Summary The average ratios of grocery store and discount department building space per capita and are summarized below. The discount department stores included in this analysis are Wal- Mart, Target and K-Mart. Once again, these are general averages and demand ratios for any particular sub-market may vary to some extent. However, the guidelines provide an indication for the extent of retail development demanded by residential uses.
Table 3-6
Retail Building Space "Rules of Thumb" Maricopa County
Current Retail Store SF per Capita Grocery Store 4.5 Discount Department Store 2.8
Critical Mass Support Persons Households1/ Grocery Store 12,600 4,667 Discount Department Store 52,700 19,519 ______1/Based on the Maricopa County average of 2.7 persons per household
Source: ASU Real Estate Center, Elliott D. Pollack & Co.
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3.2 Office Market
Following is a general overview and summary of the office sectors A community’s potential to develop this sector is dependent on nearby competition, a large and educated labor force, transportation access, and other forms of economic competitiveness.
Throughout Maricopa County, the office market is comprised of approximately 122.0 million square feet of space. Office buildings are categorized into two types of uses: administrative and medical. Administrative buildings total approximately 107.0 million square feet of space while medical office buildings total 15.0 million square feet. As shown on the table below, 82.1% of all office space is found within three cities: Phoenix, Scottsdale, and Tempe. Approximately 97.8% of all space is found in the nine cities shown on the following table. Administrative office buildings are concentrated in central locations such as Downtown Phoenix, the Central Avenue corridor, Camelback Road, the 44th St./Gateway area, and in several locations in Scottsdale.
Table 3-7
Office Building Space by City Through Second Quarter 2007
Medical Administrative Total Square Feet Market Share Square Feet Market Share Square Feet Market Share Phoenix 6,100,129 40.6% 63,000,301 58.9% 69,100,430 56.6% % of City Total 8.8% 91.2%
Scottsdale 2,496,159 16.6% 18,050,358 16.9% 20,546,517 16.8% % of City Total 12.1% 87.9%
Tempe 531,880 3.5% 9,934,363 9.3% 10,466,243 8.6% % of City Total 5.1% 94.9%
Mesa 2,078,856 13.8% 6,002,184 5.6% 8,081,040 6.6% % of City Total 25.7% 74.3%
Chandler 514,666 3.4% 3,392,423 3.2% 3,907,089 3.2% % of City Total 13.2% 86.8%
Glendale 1,005,681 6.7% 1,882,178 1.8% 2,887,859 2.4% % of City Total 34.8% 65.2%
Gilbert 556,851 3.7% 1,521,631 1.4% 2,078,482 1.7% % of City Total 26.8% 73.2%
Sun City 700,614 4.7% 497,748 0.5% 1,198,362 1.0% % of City Total 58.5% 41.5%
Peoria 382,217 2.5% 671,706 0.6% 1,053,923 0.9% % of City Total 36.3% 63.7%
Remainder of County 670,167 5.8% 2,008,409 1.9% 2,678,576 2.2% % of Total 25.0% 75.0%
Maricopa County Total 15,037,220 106,961,301 121,998,521 Percent of Total 12.3% 87.7%
Source: Elliott D. Pollack & Co, Kammrath Associates
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While administrative office buildings are highly concentrated by location, medical office buildings are more dispersed. Since medical services need to be near patients, medical office space is related to the size of the population. For instance, across Maricopa County, there are 3.8 square feet of medical office space for every person. The inventory of office space for most cities approximates that figure. Scottsdale is the only community with a high level of medical office on a per capita basis. Phoenix’s per capita medical office inventory is approximately equal to that of the county.
Table 3-8
Office Building Square Feet Per Capita 2006
City Administrative Medical Chandler 12.5 2.2 Gilbert 7.5 2.4 Glendale 7.4 3.8 Mesa 12.4 4.5 Peoria 4.1 2.6 Phoenix 41.5 4.0 Scottsdale 74.3 10.3 Tempe 56.7 3.2 Maricopa County 27.5 3.8
Sources: Department of Economic Security, Kammrath Associates; Elliott D. Pollack & Co.
By comparison, the inventory of administrative office space on a per capita basis is highly concentrated within the cities of Phoenix, Scottsdale, and Tempe. These communities all exceed the county average of 27.5 square feet of office space per person.
The Maricopa County office market is stratified by building size in the following table. Administrative office space is highly concentrated in buildings over 100,000 square feet in size. Most of these buildings are of a mid-rise or high-rise configuration located in the metro area's office cores. Smaller buildings are typically found in suburban areas. By comparison, the medical office market is highly dispersed into smaller buildings. Only 13.4% of the total medical office square footage is found in buildings over 100,000 square feet in size. This data confirms that the medical office market is rather evenly dispersed throughout the Valley and is found close to the client population. Data related to office space sales prices in Greater Phoenix is also displayed below.
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Table 3-9
Maricopa County Office Buildings Second Quarter 2007
Total Office Total SF % of Total SF # Buildings Avg. Size Under 50,000 SF 41,929,826 34.4% 3,793 11,055 50,000 SF - 100,000 SF 23,825,340 19.5% 342 69,665 Over 100,000 SF 56,243,355 46.1% 284 198,040 Total 121,998,521 100.0% 4,419 27,608
Administrative Total SF % of Total SF # Buildings Avg. Size Under 50,000 SF 32,673,951 30.5% 2,868 11,393 50,000 SF - 100,000 SF 20,057,860 18.8% 286 70,132 Over 100,000 SF 54,229,490 50.7% 272 199,373 Total 106,961,301 100.0% 3,426 31,220
Medical Total SF % of Total SF # Buildings Avg. Size Under 50,000 SF 9,255,875 61.6% 925 10,006 50,000 SF - 100,000 SF 3,767,480 25.1% 56 67,276 Over 100,000 SF 2,013,865 13.4% 12 167,822 Total 15,037,220 100.0% 993 15,143
Sources: Kammrath Associates; Elliott D. Pollack & Co.
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Chart 3-4
Average Price per Square Foot of Office Buildings Metro Phoenix Source: Kammrath & Associates
$400.00 250
$350.00 200 $300.00
$250.00 150
$200.00 Price/ SF
100 No. of Sales $150.00
$100.00 50 $50.00
$0.00 0
1 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 200 2002 2003 2004 2005 2006 2007*
*Data through Q2 2007 Number of Transactions Price per Square Foot
Local Serving Office Uses The office market is typically the last segment of the commercial real estate market to enter a newly growing suburban area. In the early years of a community’s development, most office construction activity is oriented towards small professional office space that serves the local population. This is referred to in this report as “local-serving” space. Local-serving office space typically houses small professional firms providing services to the nearby population. These services include real estate agencies, title insurance and mortgage companies, attorneys, accountants, and doctors and dentists who desire to be close to their customer base.
The other segment of the market found in metro Phoenix is regional-serving office. Buildings in this category provide space for regional headquarters and a variety of other services such as banking, finance, and insurance, all of which typically provide services beyond the city in which they are located.
Local-serving office space is found in most communities, both large and small. Companies occupying these buildings follow closely behind the development of residential areas, similar to retail development. In the early stages of the development of a community, local-serving office users may locate within retail strip malls or shopping centers. However, as the area matures, the construction of small, professional office buildings will follow.
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For the purposes of this study, local-serving office is defined as those buildings less than 50,000 square feet in size. As noted on the prior table, these buildings account for 85.9% of all the office buildings in Maricopa County. However, they account for only 34.4% of the total office space with an average size of 11,056 square feet.
The following chart shows the square feet of office space per capita by building size in Maricopa County. On a per capita basis, administrative office buildings with less than 50,000 square feet provide 8.37 square feet for every person in Maricopa County. Most of the suburban communities are well below this level. The large office buildings over 100,000 square feet are highly concentrated in Phoenix, Scottsdale and Tempe. In the medical office category, the dispersion of office buildings less than 50,000 square feet in size is much more even across the communities. The county average is 2.36 square feet per capita. There are very few large medical office buildings in the area, concentrated in just four communities. Table 3-10
Square Feet of Office Space Per Capita By Building Size 2006
Administrative Office Medical Office Under 50,000 SF - Over Under 50,000 SF - Over City 50,000 SF 100,000 SF 100,000 SF Total 50,000 SF 100,000 SF 100,000 SF Total Avondale 3.04 0.92 - 3.96 0.72 - - 0.72 Chandler 3.72 1.48 7.25 12.46 1.60 0.59 - 2.19 Gilbert 2.95 2.95 1.59 7.49 1.79 0.64 - 2.43 Glendale 3.76 1.53 2.13 7.41 2.17 1.63 - 3.80 Goodyear 4.56 1.78 - 6.33 1.93 - 2.07 4.00 Mesa 6.76 3.30 2.39 12.45 3.15 0.87 0.47 4.50 Peoria 2.51 1.59 - 4.09 2.13 0.51 - 2.63 Phoenix 10.54 6.51 24.46 41.50 2.36 0.89 0.73 3.98 Queen Creek 2.94 - - 2.94 0.55 - - 0.55 Scottsdale 22.97 18.99 32.37 74.33 4.84 2.94 2.52 10.30 Surprise 2.08 0.76 - 2.84 0.36 - - 0.36 Tempe 15.98 11.13 29.58 56.69 3.21 - - 3.21 County 8.37 5.11 14.00 27.48 2.36 0.94 0.53 3.83
Sources: Department of Economic Security; Kammrath Associates; Elliott D. Pollack & Co.
The demand for local-serving office space is estimated at 8.37 square feet per capita for administrative office and 2.36 square feet per capita for medical office for a total of 10.73 square feet per capita. However, it should be noted that most of the suburban communities have local-serving office space well below these levels, particularly for the administrative office segment of the market. Even Mesa, the third largest city in the State, has just under seven (chart = 6.76) square feet per capita of administrative office space in the community today. Therefore, this estimate could overstate the demand for office space.
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Since 1980, an average of 3.17 million square feet of administrative office space has been constructed annually in Greater Phoenix. Due to the change in tax laws in the late 1980s, very little inventory was constructed between 1991 and 1997. In 1997, construction started again in earnest, reaching over 6 million square feet in 2000. However, shortly thereafter, vacancy rates rose to more than 18%, reducing demand and development activity. From 1997 to 2005, an average of 4.25 million square feet has been constructed annually.
Chart 3-5
Construction of Administrative Office Space Greater Phoenix 1980 - 2006 Source: Kammrath & Associates, Elliott D. Pollack & Co. 9.00
8.00 7.68
7.00 6.46
6.00 5.29 5.39 4.82 5.00 4.65 4.80 4.66 4.71 4.13 4.00 3.75 3.78 3.103.15 Annual Average 3.17 M SF 3.16 2.80 3.00 2.56 Square Feet (in millions) (in Feet Square 2.50 2.25 2.05 2.00 1.18 1.05 1.00 0.57 0.210.300.33 0.24 0.00
2 5 6 9 3 7 0 1 4 * 80 81 84 88 92 95 96 99 02 03 6 19 19 198 1983 19 198 198 1987 19 198 1990 1991 19 199 1994 19 19 199 1998 19 200 200 20 20 200 2005 00 2 *Due to delays in reporting, the 2006 count may be low.
Office Construction Activity by Geographic Area The zip codes that have received the highest levels of administrative office construction in Metro Phoenix between 1987 and the second quarter of 2007 are shown on the following table. The table following the 20 year rankings illustrates the same data but in more recent years, capturing new construction between 2001 and the second quarter of 2007. The area that has experienced the most construction has been the Deer Valley, Northeast Phoenix and North Scottsdale submarkets. Taking the Northeast Phoenix and North Scottsdale areas for example, this market area, which includes that part of the City of Phoenix adjacent to the Scottsdale Airport, has accounted for approximately 9.9 million square feet of new office space in the last 20 years. Over 4.9 million square feet of that total has been built since 2001. The next most active area has been north Deer Valley, bordering the I-17 Freeway north of the 101 freeway, where 4.5 million square feet has been constructed since 1987, and nearly 2.0 million square feet of that total since 2001.
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Table 3-11
Top 20 Zip Codes for Administrative Office Construction
Metro Phoenix
1987 to 2007 Q2
Rank Zip Code Market Area SF
1 85027 Deer Valley 4,508,566 2 85260 North Scottsdale 4,049,786 3 85004 Downtown Phoenix 3,542,066 4 85016 Camelback Corridor 3,110,751 5 85281 North Tempe 3,010,294 6 85255 North Scottsdale 2,297,142 7 85012 Central Avenue 2,124,540 8 85258 North Scottsdale 1,941,475 9 85008 North Sky Harbor 1,733,472 10 85282 North Tempe 1,681,925 11 85254 NE Phoenix 1,658,868 12 85251 Downtown Scottsdale 1,633,416 13 85044 Ahwatukee 1,521,190 14 85040 South Sky Harbor 1,304,739 15 85284 South Tempe 1,263,976 16 85021 North Phoenix 1,040,742 17 85248 South Chandler 1,016,439 18 85224 West Chandler 1,012,876
19 85029 North Phoenix 957,520
20 85020 North Phoenix 904,492
Source: Kammrath & Associates, Elliott D. Pollack & Co.
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Table 3-12
Top 20 Zip Codes for Administrative Office Construction Metro Phoenix 2001 to 2007 Q2
Rank Zip Code Market Area SF 1 85260 North Scottsdale 2,538,227 2 85027 Deer Valley 1,968,220 3 85255 North Scottsdale 1,237,095 4 85224 West Chandler 815,923 5 85248 South Chandler 704,836 6 85281 North Tempe 704,325 7 85254 NE Phoenix 674,995 8 85258 North Scottsdale 476,444 9 85032 NE Phoenix 471,385 10 85226 SW Chandler 450,720 11 85308 NW Phoenix 448,759 12 85004 Downtown Phoenix 446,952 13 85296 Gilbert/Williams Field 377,330 14 85040 South Sky Harbor 364,179 15 85206 SE Mesa 359,426 16 85306 NW Phoenix 347,390 17 85233 North Gilbert 342,271 18 85016 Camelback Corridor 311,514 19 85284 South Tempe 310,733 20 85012 Central Avenue 296,862
Source: Kammrath & Associates, Elliott D. Pollack & Co.
In terms of rents, the overall lack of supply has pushed up rates in recent years. According to Lee & Associates, by the end of 2006, Class A space was renting for just under $26 per square foot in the Metro Phoenix area. The same is true of the Mesa/Chandler area, but with rents approaching $24.00 for Class A space. See the following charts.
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Chart 3-6
Metro Phoenix Rental Rates 1999 to 2006 Source: Lee & Associates Arizona
$30.00 $25.96
$25.00
$22.62 $20.51 $20.00
$18.75 $16.30
$15.00 $15.99
$10.00
$5.00
$- 1999 2000 2001 2002 2003 2004 2005 2006
Class A Class B Class C
Chart 3-7
Mesa/Chandler Rental Rates 1999 to 2006 Source: Lee & Associates Arizona
$30.00
$23.90 $25.00
$19.36 $20.00 $20.15 $16.30 $17.55 $15.00 $15.14
$10.00
$5.00
$- 1999 2000 2001 2002 2003 2004 2005 2006
Class A Class B Class C
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Speculative Office Market
The speculative office market is comprised of buildings that are constructed with the purpose of leasing to tenants. Most of the major commercial brokerage companies focus on this section of the market, which at the end of the second quarter of 2007 comprised 66.3 million square feet of building space according to CB Richard Ellis. This represents approximately 62% of the 107.0 million square foot administrative office market in Metro Phoenix. CB Richard Ellis tracks all office buildings in its survey that are larger than 20,000 square feet.
The speculative office market over the years has been extremely cyclical with periods of exceptionally high vacancy rates followed by periods of virtually no construction activity. In the late 1980’s and early 1990’s, the office market reached historic high vacancy rates due to overbuilding that occurred. This was a result of tax laws that were enacted during the Reagan Administration but were then rescinded in 1986. In the early 1990s virtually no construction activity occurred until vacancy rates reached 9.5% in 1996. Construction activity continued until 2003 when vacancy rates, once again, reached the 18% level. Since that time, however, vacancy rates have declined precipitously which is now spurring construction activity again. It should be noted that while parts of the metro area have had virtually no construction over the past five years, other areas such as the Camelback Corridor and North Scottsdale have experienced most of the spec office construction activity.
At the end of the second quarter of 2007, vacancy rates for spec office stood at 13.0% across Greater Phoenix while over 1.1 million square feet of space was added during the quarter. The recent small increases in the inventory of office space in Metro Phoenix have also been partly due to condominium conversions over the past few years that have reduced the available supply. Between 2002 and 2006, 6.6 million square feet of spec office space was created. However, the inventory of spec office only increased by about 3.5 million square feet over that timeframe due to the conversion of existing spec office space to condominiums.
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Chart 3-8
Spec Office Vacancy Rates vs. Change in Inventory Metro Phoenix Source: Elliott D. Pollack & Co; CB Richard Ellis 30.0% 6.00
5.02 25.7% 5.00 25.0%
22.6% 4.00 20.0% 18.8% 18.8% 18.4% 2.75 16.0% 3.00 2.56 16.4% 2.40 15.0% 2.31 2.32 14.8% 2.14
1.64 12.6% 2.00 Million SF Percent Vacant Percent 11.7% 10.0% 11.1% 9.5% 9.2% 9.5% 10.0% 9.9% 1.00 0.31 0.08 5.0% 0.00 0.00 0.01 0.00 -0.13 -0.26 -0.18
0.0% -1.00 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Change in Inventory Vacancy Rate
Mesa-Gilbert Office Market
Since the Town of Gilbert is directly adjacent to the Mesa Gateway Study Area, the following table was developed for the Mesa-Gilbert office market. The table shows construction activity in those two cities since 1980 as well as the total inventory of office space available. Since 1980, the Mesa-Gilbert area has accounted for approximately 8.7% of office construction activity in Maricopa County or approximately 312,000 square feet of construction per year. Since 1980, 8.4 million square feet of office space has been constructed in the Mesa-Gilbert area compared to 96.4 million in all of Maricopa County. The average annual construction in office space in the County is under 3.6 million square feet. Since 2000, the Mesa-Gilbert area has averaged over 576,000 square feet of office space construction per year. Therefore, the share of the market found in Mesa and Gilbert is beginning to increase. In fact, the area accounted for approximately one-third of all County office construction in 2006.
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Table 3-13
Mesa - Gilbert Office Market
Construction Inventory Maricopa Maricopa Mesa-Gilbert County % of Total Mesa-Gilbert County % of Total 1980 88,470 4,182,464 2.1% 1,671,011 29,094,414 5.7% 1981 57,739 1,486,442 3.9% 1,728,750 30,580,856 5.7% 1982 311,091 5,933,714 5.2% 2,039,841 36,514,570 5.6% 1983 372,815 3,094,349 12.0% 2,412,656 39,608,919 6.1% 1984 351,656 5,504,482 6.4% 2,764,312 45,113,401 6.1% 1985 295,947 8,193,812 3.6% 3,060,259 53,307,213 5.7% 1986 893,784 5,098,975 17.5% 3,954,043 58,406,188 6.8% 1987 385,780 4,107,148 9.4% 4,339,823 62,513,336 6.9% 1988 320,342 3,592,813 8.9% 4,660,165 66,106,149 7.0% 1989 134,979 4,317,860 3.1% 4,795,144 70,424,009 6.8% 1990 94,765 2,471,768 3.8% 4,889,909 72,895,777 6.7% 1991 19,292 1,119,482 1.7% 4,909,201 74,015,259 6.6% 1992 76,532 400,904 19.1% 4,985,733 74,416,163 6.7% 1993 66,072 654,832 10.1% 5,051,805 75,070,995 6.7% 1994 229,636 479,156 47.9% 5,281,441 75,550,151 7.0% 1995 93,035 823,494 11.3% 5,374,476 76,373,645 7.0% 1996 76,414 434,288 17.6% 5,450,890 76,807,933 7.1% 1997 90,192 4,287,510 2.1% 5,541,082 81,095,443 6.8% 1998 119,674 5,237,172 2.3% 5,660,756 86,332,615 6.6% 1999 304,535 5,634,963 5.4% 5,965,291 91,967,578 6.5% 2000 784,012 6,728,664 11.7% 6,749,303 98,696,242 6.8% 2001 260,216 5,068,201 5.1% 7,009,519 103,764,443 6.8% 2002 480,364 3,079,712 15.6% 7,489,883 106,844,155 7.0% 2003 292,298 3,363,325 8.7% 7,782,181 110,207,480 7.1% 2004 579,943 3,639,966 15.9% 8,362,124 113,847,446 7.3% 2005 802,909 4,986,028 16.1% 9,165,033 118,833,474 7.7% 2006 835,915 2,487,812 33.6% 10,000,948 121,321,286 8.2% Total 8,418,407 96,409,336 8.7% Average Annual 311,793 3,570,716
Sources: Kammrath & Associates, Elliott D. Pollack & Co.
At the end of 2006, Mesa and Gilbert had an inventory of approximately 10 million square feet of office space representing 8.2% of the total county inventory. As noted on the table, Mesa-Gilbert’s percentage of the county inventory has been increasing over the years to the point where it now counts for 8.2% of all office space. However, the combined population of Mesa and Gilbert represent approximately 16.8% of the County’s population. Therefore, the area is underrepresented in terms of its proportionate share of the office market based on population.
3.3 Industrial Market Overview
This section of the report will outline the dynamics of the Metro Phoenix industrial sector. Industrial uses are typically clustered near important transportation corridors such as freeways, railroads and airports. Modern business parks are found throughout all parts of the Valley, but usually desire locations near freeways that are accessible to the labor force.
The industrial sector is the largest segment of the commercial real estate market. This firm uses a number of different sources to track the industrial market, but the most
44 Task 2d: Current Trends Economic Base Memorandum detailed information is provided by Kammrath and Associates which primarily depends upon the County Assessor’s records for their database. The data used in this analysis is primarily derived from the Kammrath and Associates 2007 second quarter database. It includes all buildings larger than 10,000 square feet in size. Due to time delays in placing newly developed property on the Assessor’s tax rolls, the Kammrath and Associates database typically lags behind market construction activity.
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Table 3-14 Industrial Building Space by City Second Quarter 2007
Manufacturing Industrial Park Office Warehouse Warehouse/ Distribution Total Square Feet Market Share Square Feet Market Share Square Feet Market Share Square Feet Market Share Square Feet Market Share Chandler 11,078,346 19.0% 1,593,909 4.5% 1,860,266 7.1% 4,679,006 3.8% 19,211,527 8.0% % of City Total 57.7% 8.3% 9.7% 24.4%
Gilbert 935,528 1.6% 1,333,967 3.8% 1,209,352 4.6% 1,796,400 1.5% 5,275,247 2.2% % of City Total 17.7% 25.3% 22.9% 34.1%
Glendale 1,718,702 3.0% 974,918 2.8% 427,028 1.6% 6,222,844 5.1% 9,343,492 3.9% % of City Total 18.4% 10.4% 4.6% 66.6%
Mesa 3,452,877 5.9% 3,279,350 9.3% 1,114,612 4.2% 5,476,601 4.5% 13,323,440 5.5% % of City Total 25.9% 24.6% 8.4% 41.1%
Phoenix 24,700,219 42.5% 15,628,339 44.2% 11,085,812 42.1% 73,707,269 60.5% 125,121,639 51.8% % of City Total 19.7% 12.5% 8.9% 58.9%
Scottsdale 2,265,573 3.9% 4,725,818 13.4% 3,204,739 12.2% 826,523 0.7% 11,022,653 4.6% % of City Total 20.6% 42.9% 29.1% 7.5%
Tempe 7,094,208 12.2% 7,036,341 19.9% 6,798,399 25.8% 12,615,578 10.4% 33,544,526 13.9% % of City Total 21.1% 21.0% 20.3% 37.6%
Remainder of County 6,911,985 11.9% 825,566 2.3% 609,061 2.3% 16,427,525 13.5% 24,774,137 10.3% % of Total 27.9% 3.3% 2.5% 66.3%
Maricopa County Total 58,157,438 35,398,208 26,309,269 121,751,746 241,616,661 Percent of Total 24.1% 14.7% 10.9% 50.4%
Source: Elliott D. Pollack & Co; Kammrath & Associates
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Throughout Metro Phoenix, the industrial market is comprised of approximately 241.6 million square feet of space (buildings greater than 10,000 square feet in size). Industrial buildings are categorized into four types of uses by Kammrath and Associates: Assembly or Manufacturing, Multi-Tenant (Industrial Park), Office/Warehouse, and Warehouse/Distribution. As of the latest data available through second quarter 2007, Assembly or Manufacturing buildings totaled about 58.2 million square feet of space (or 24.1% of total space) and Multi-Tenant buildings totaled 35.4 million square feet (or 14.7% of total). In addition, there were another 26.3 million square feet of Office/Warehouse buildings (10.9% of total) and 121.8 million square feet of Warehouse/Distribution buildings (50.4% of total).
As shown in the above table, 73.6% of all industrial space is found within three cities: Phoenix, Tempe, and Chandler. Phoenix accounts for more than half of the inventory and about 14% is found in the City of Tempe. About 89.7% of the industrial inventory is found within the seven largest cities in Maricopa County. Phoenix also holds a market share of 42.5% of all assembly or manufacturing space in the region, followed by Chandler which hosts two large Intel plants and other assorted high tech companies.
The entire industrial inventory of Maricopa County by square feet and by acreage is shown in the following table by type of building and city. The City of Phoenix accounts for 51.8% of the industrial space in the County. In total, industrial uses consume approximately 20,797 acres of land across the County. Sales price data is also displayed in a subsequent chart.
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Table 3-15
Industrial Inventory By Type Maricopa County Second Quarter 2007
Square Feet By Building Type City Manufacturing Industrial Park Office Warehouse Warehouse Total Avondale 116,512 75,632 90,545 212,998 495,687 Buckeye 448,331 1,910,157 2,358,488 Chandler 11,078,346 1,593,909 1,860,266 4,679,006 19,211,527 County 1,415,507 31,600 30,497 1,784,415 3,262,019 El Mirage 306,317 516,045 822,362 Fountain Hills 35,605 92,056 21,962 149,623 Gilbert 935,528 1,333,967 1,209,352 1,796,400 5,275,247 Glendale 1,718,702 974,918 427,028 6,222,844 9,343,492 Goodyear 2,547,816 44,293 869,758 3,461,867 Guadalupe 107,104 107,104 Mesa 3,452,877 3,279,350 1,114,612 5,476,601 13,323,440 Peoria 321,899 669,542 280,520 611,707 1,883,668 Phoenix 24,700,219 15,628,339 11,085,812 73,707,269 125,121,639 Queen Creek 13,187 16,010 42,336 71,533 Scottsdale 2,265,573 4,725,818 3,204,739 826,523 11,022,653 Sun City 55,140 10,469 65,609 Surprise 113,924 310,987 424,911 Tempe 7,094,208 7,036,341 6,798,399 12,615,578 33,544,526 Tolleson 1,641,679 10,029,587 11,671,266 Grand Total 58,157,438 35,398,208 26,309,269 121,751,746 241,616,661
Land Area (Acres) By Building Type City Manufacturing Industrial Park Office Warehouse Warehouse Total Avondale 12 16 8 73 109 Buckeye 73 156 229 Chandler 1,259 134 161 427 1,981 County 440 2 8 1,228 1,678 El Mirage 180 139 319 Fountain Hills 2 6 1 9 Gilbert 74 94 137 207 512 Glendale 181 75 44 439 738 Goodyear 196 4 160 359 Guadalupe 77 Mesa 496 226 124 437 1,283 Peoria 26 62 27 70 185 Phoenix 1,893 1,069 865 5,231 9,058 Queen Creek 1 2 14 17 Scottsdale 187 385 225 66 863 Sun City 2 1 3 Surprise 34 35 69 Tempe 517 473 471 824 2,286 Tolleson 116 976 1,092 Grand Total 5,684 2,538 2,084 10,490 20,797
Source: Kammrath & Associates, Elliott D. Pollack & Company.
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Chart 3-9
Average Price Per Square Foot for Industrial Buildings Metro Phoenix Source: Kammrath & Associates $100 $93 $90 $81 $80 $69 $70
$60 $55 $52 $49 $51 $51 $50 $46 $47 $43 $45 $44
Price/ SF $40 $38 $40 $35 $37 $30 $30 $26 $26 $23 $24 $22 $20
$10
$0
7 3 5 8 1 3 7* 985 8 988 990 9 9 996 9 999 0 002 0 004 0 1 1986 19 1 1989 1 1991 1992 19 1994 19 1 1997 19 1 2000 20 2 20 2 2005 2006 20
*Data through 2007 Q2
Industrial square footage per capita for the largest cities in the Valley is represented on the following table. The inventory of total industrial space on a per capita basis is highly concentrated within the cities of Phoenix, Chandler, and Tempe. These communities all exceed the County average of 67.6 square feet of industrial space per person.
Table 3-16
Industrial Building SF Per Capita 2006
City Total Space Chandler 83.3 Gilbert 30.9 Glendale 44.6 Mesa 35.4 Phoenix 86.0 Scottsdale 53.1 Tempe 209.9 Maricopa County 67.6
Source: Kammrath & Associates, Elliott D. Pollack & Company.
Between 1990 and 2006, the industrial market in Maricopa County increased by more than 99.3 million square feet, absorbing approximately 9,201 acres. Moreover, these
49 Task 2d: Current Trends Economic Base Memorandum figures do not take into account buildings smaller than 10,000 square feet in size. Smaller industrial buildings typically do not absorb a significant amount of acreage throughout the County. Based on an analysis of County tax records, in recent years, buildings smaller than 10,000 square feet account for only 6% of total construction activity (in square feet). On average, the County has experienced the construction of more than 5.8 million square feet of space annually.
Table 3-17
Industrial Building Construction 1990 - 2006 Maricopa County
Year Built SF Built Acres 1990 3,373,358 209 1991 4,461,997 449 1992 2,137,930 554 1993 3,897,066 344 1994 3,157,657 239 1995 5,649,795 476 1996 10,165,979 1,079 1997 8,576,384 746 1998 9,184,780 674 1999 8,133,873 821 2000 8,525,486 886 2001 7,293,116 470 2002 3,407,128 298 2003 3,702,213 217 2004 4,035,371 399 2005 6,673,297 791 2006 6,941,307 550 Total 99,316,737 9,201 Avg. Annual 5,842,161 541
Sources: Kammrath & Associates, Elliott D. Pollack & Company.
Due to different collection methods, the following data prepared by CB Richard Ellis differs from the data prepared by Kammrath and Associates. However, the trend is still the same. The Metro Phoenix industrial market has rarely experienced vacancy rates higher than 10%. The vacancy rate at the second quarter of 2007 stood at 7.6%. CB Richard Ellis estimates that the average annual increase in the industrial inventory is 6.0 million square feet. Through the second quarter of 2007, the inventory had increased by nearly 6.0 million square feet already.
The preferred location for industrial development in Greater Phoenix is near a freeway. Such sites are preferred by industrial developers as well as companies that may be expanding in or relocating to Greater Phoenix. The presence of I-10 is a significant asset that has and will continue to attract businesses to the area near Sky Harbor International Airport.
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The following map shows the location of all industrial buildings in central Maricopa County. Most industrial areas are found along existing freeways or major transportation routes that existed prior to the construction of the freeway system. One of the heaviest concentrations of industrial uses is found south of Sky Harbor International Airport in Phoenix and Tempe.
The subsequent map shows employment density for central Maricopa County. The densest concentrations of employment are in central Phoenix, including the area surrounding Sky Harbor International Airport, north Tempe and North Scottsdale. These areas will continue to attract employers because of the high capacity transportation network that is in place to serve businesses.
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Map 3-1
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Map 3-2
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Mesa-Gilbert Industrial Market
Historic industrial construction activity within the Mesa-Gilbert area is shown on the following table. Since 1980, Mesa-Gilbert has accounted for approximately 20 million square feet of the 188 million square feet constructed in Maricopa County. This represents approximately 10.7% of construction activity. Over the last 26 years, an annual average of 6.9 million square feet of industrial space has been constructed in the County with 744,000 square feet constructed in the Mesa-Gilbert area.
Today, Mesa-Gilbert accounts for 22.8 million square feet of industrial space representing 8.6% of the 263 million square feet in Maricopa County. As noted on the chart, Mesa-Gilbert’s share of the industrial market has steadily risen over the years from less than 4% in 1980 to an 8.6% share in 2006. However, as noted in the office market section of this report, Mesa and Gilbert account for approximately 16.8% of the County’s population in 2006. Therefore, the area has not received its fair share of industrial development relative to its population.
Table 3-18
Mesa - Gilbert Industrial Market
Construction Inventory Maricopa Maricopa Mesa-Gilbert County % of Total Mesa-Gilbert County % of Total 1980 534,928 10,457,508 5.1% 3,247,267 86,177,383 3.8% 1981 559,795 8,496,186 6.6% 3,807,062 94,673,569 4.0% 1982 1,769,520 7,108,577 24.9% 5,576,582 101,782,146 5.5% 1983 363,953 5,396,175 6.7% 5,940,535 107,178,321 5.5% 1984 413,361 5,354,178 7.7% 6,353,896 112,532,499 5.6% 1985 1,821,231 13,059,821 13.9% 8,175,127 125,592,320 6.5% 1986 1,533,207 9,071,122 16.9% 9,708,334 134,663,442 7.2% 1987 1,173,613 7,982,324 14.7% 10,881,947 142,645,766 7.6% 1988 623,190 7,740,552 8.1% 11,505,137 150,386,318 7.7% 1989 87,068 3,384,030 2.6% 11,592,205 153,770,348 7.5% 1990 0 3,397,558 0.0% 11,592,205 157,167,906 7.4% 1991 338,100 4,461,997 7.6% 11,930,305 161,629,903 7.4% 1992 674,938 2,137,930 31.6% 12,605,243 163,767,833 7.7% 1993 202,271 3,946,558 5.1% 12,807,514 167,714,391 7.6% 1994 64,664 3,157,657 2.0% 12,872,178 170,872,048 7.5% 1995 423,054 6,692,934 6.3% 13,295,232 177,564,982 7.5% 1996 998,378 11,498,002 8.7% 14,293,610 189,062,984 7.6% 1997 1,178,114 9,628,361 12.2% 15,471,724 198,691,345 7.8% 1998 654,053 10,164,847 6.4% 16,125,777 208,856,192 7.7% 1999 614,620 9,394,139 6.5% 16,740,397 218,250,331 7.7% 2000 709,154 9,173,156 7.7% 17,449,551 227,423,487 7.7% 2001 558,057 8,009,442 7.0% 18,007,608 235,432,929 7.6% 2002 497,167 3,875,016 12.8% 18,504,775 239,307,945 7.7% 2003 1,623,919 4,556,622 35.6% 20,128,694 243,864,567 8.3% 2004 420,727 4,635,994 9.1% 20,549,421 248,500,561 8.3% 2005 1,303,955 7,714,685 16.9% 21,853,376 256,215,246 8.5% 2006 936,343 7,291,304 12.8% 22,789,719 263,506,550 8.6% Total 20,077,380 187,786,675 10.7% Average Annual 743,607 6,955,062
Sources: Kammrath & Associates, Elliott D. Pollack & Co.
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3.4 Summary
In general, Mesa has historically had a weak industrial and office market, primarily because of its location towards the periphery of the urbanized area. Office uses in particular have been missing from the local real estate market. Comparatively, it has had a strong retail market and, until the growth of Chandler and Gilbert, was the dominant community in the area relative to retail sales. However, the construction of Chandler Fashion Center and the planned Gilbert regional mall will have a significant impact on City revenues. No longer will residents of adjacent communities shop in Mesa. As a result, retail centers like Fiesta Mall have experienced some distress and need to be repositioned in the market.
Now that the Southeast Valley is reaching some maturity with the pending build-out of Chandler and Gilbert in the next ten years, a strong labor base will begin to attract speculative office developers. Mesa will be a major recipient of demand for office buildings as well. The completion of the Loop 202 in the Southeast Valley will also contribute to demand for office uses.
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4.0 Local Competition for Business Locations
One of the major challenges that administrators and planners for the Mesa Gateway Area will encounter during the next several decades is the fact that other parts of the Metro Phoenix area will also be vying for similar business and employment uses.
A competitive analysis was completed to obtain perspective into:
• Where the majority of site location competition will arise and the timing of such competition, • What attributes Phoenix-Mesa Gateway Airport might promote to expand business attraction efforts, and • What industries might be suitable targets given their short and long term outlook potential. These target industries will be analyzed for both short term (0-10 years) and long term (10 years+) potential.
The criteria from which these areas will be analyzed include the following:
• Location relative to existing and future population centers, • Location relative to transportation infrastructure (i.e. highways, airports, railroads), • Existing infrastructure and potential infrastructure issues, • Capacity to accommodate employment growth.
4.1 Significant Competitor Sites
Scottsdale Airpark The Scottsdale Airpark, located east of Scottsdale Road at Greenway has been one of the most successful areas for both office and light industrial development for the past twenty years. Within the Airpark area exists more than 6.2 million square feet of office and 8.9 million square feet of industrial building space. Over the past three years, office construction has been particularly strong, capturing 17% of the entire Metro Phoenix market. The Airpark area has captured nearly 11% of the office market for the past ten years. The area has consistently captured about 5% of the industrial market for the past ten years as well.
The Airpark is in a highly developed region of Metro Phoenix, with additional residential development expected to occur to the north at Desert Ridge and Paradise Ridge. This was not always the case, though. Until relatively recently, the Scottsdale Airpark was considered on the periphery of Greater Phoenix, with poor transportation access and a small local population base. During the 1980’s the area captured only 3% of the office and industrial markets. Only when the Loop 101 freeway was completed and the nearby population swelled did office development expand significantly.
In terms of transportation access, the Scottsdale Airpark has a small airport and immediate local freeway access. The airport is primarily utilized for small passenger
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planes, and the freeway is mostly local-serving, with access to Interstate 17 fifteen miles to the northwest. The transportation situation is a factor in the types of businesses that have located in the airpark. The industrial development includes many companies that service the aviation industry and local small manufacturing demand rather than distribution and warehousing. With the completion of the Loop 101 and a strong arterial road system, the Scottsdale Airpark is in a favorable location for most types of small to medium sized office development.
In recent years, the Airpark and adjacent property in Phoenix has also developed a wide array of retail and restaurant uses that now serve both the nearby population as well as employees. The convenience of these amenities to the office market has helped to stimulate further office construction and made the Airpark an attractive place to work.
After many years of strong construction in both office and industrial buildings, the Scottsdale Airpark is nearing build-out. There is still vacant land available, but the supply will likely run out within the next five years. The Scottsdale Airpark is directly competitive with Phoenix-Mesa Gateway for both office and light industrial users in the short term. Both are located near an educated and growing population base, along a major local freeway, with an accompanying airport. Currently, Scottsdale enjoys a certain prestige and name recognition that attracts businesses to the Airpark. This name recognition is fostered by facilities such as West World where the Barrett Jackson Car Auction is held and the TPC golf course where the Phoenix Open is held. As the Scottsdale Airpark builds out, however, the 500,000 to a million plus square feet of office and industrial space each year that is currently being built there will be absorbed by the next most attractive options.
City of Goodyear The primary employment center within the City of Goodyear is the area surrounding the Phoenix Goodyear Airport at Lower Buckeye Road and Bullard Avenue. This area, which stretches south from I-10 to Southern Avenue encompasses most of Goodyear’s 5,200 planned acres of light industrial and 1,300 acres of general industrial land. There is no specific designation for office uses. The area is highlighted on a portion of the Goodyear General Plan Land Use map on the following page.
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Map 4-1
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Residential development within Goodyear greatly accelerated during the past three to five years, especially along the I-10. Much of the remaining vacant residential land will be developed in the next five to ten years, as Goodyear is immediately in the path of growth that is surging out from central Phoenix. The Phoenix Goodyear Airport will soon be surrounded by residential development as well as being near the mixed-use Goodyear City Center project to the northwest. Additional residential development south of the airport, as well as in Buckeye south of I-10, will provide an even larger potential labor base.
The Phoenix Goodyear Airport and the surrounding area is in a favorable location relative to transportation access. The airport, while not used for much passenger traffic, can be utilized for air cargo. More important is access to I-10, which is the major interstate connecting California, Arizona, and several states to the east. There is also a rail line nearby.
There appear to be no infrastructure issues related to this region which would dissuade an employer from locating in Goodyear. There are major arterial roads that extend south from the freeway and development in Goodyear does not seem to have a problem acquiring water and sewer service.
The employment land surrounding the airport is largely vacant, meaning that there are few capacity constraints in the short-term. Most of the 6,500 combined planned acres of industrial land are still available for development. This equates to total capacity for more than 50 to 60 million square feet of industrial building space.
The Phoenix Goodyear Airport region has the potential to develop a large industrial base over the next twenty years and beyond. This area will primarily have an edge over Phoenix-Mesa Gateway in competing for warehousing space. The location along the I-10 makes Goodyear very attractive for distribution and warehousing operations. In terms of other types of manufacturing, this area does not appear to have any important competitive advantages. Like Phoenix-Mesa Gateway, it has enough land to satisfy demand for many decades. Goodyear does not appear to be a major competitor for office or business park users.
Deer Valley Airport Area The Deer Valley Airport is located at 7th Avenue and Deer Valley Road. The area surrounding the airport has become a major employment center for both office and industrial users in Greater Phoenix. Within three miles there exists approximately 5.5 million square feet of office and 10 million square feet of industrial buildings. Industrial construction has been relatively consistent in the area for more than a decade. Over the past ten years, this area has captured 6.2% of the Metro Phoenix industrial market. Office development in the area is less predictable as there are many large office users such as Discover Card, USAA, and Honeywell. In recent years there has been very little office space constructed.
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The Deer Valley area is in an area that has a high density of residential development to the south and a growing population to the north, along the I-17. It will be the nearest office and industrial employment center for most of the new residents north along the I- 17. This area has the benefit of both a large existing population and the potential for significant growth.
In the case of the Deer Valley area, it appears as if the airport itself is not the major driver for development. Rather, its location at the confluence of two major highways has been most important, especially for office development. A large portion of the industrial development is classified as warehouse, which is attributed to the I-17 highway. However, more than two thirds is classified as something other than warehousing, indicating that this is an attractive area for other types of light manufacturing as well. There appear to be no transportation or utility infrastructure issues that would negatively impact this area.
The Deer Valley area is largely developed, however there are still several vacant parcels of land, including approximately 800 acres of State Land immediately to the north and south of the airport. There are other privately held parcels along I-17 that could hold large office buildings. Depending on the status of the State Land, this area could continue absorbing both office and industrial space for at least the next ten to fifteen years.
The area will likely continue to develop in a similar pattern as in the past, with large office users and a mix of industrial buildings. These types of development will likely be targeted by Phoenix-Mesa Gateway as well. A major office user such as a USAA would help establish and anchor the area. Also, with the exception of warehousing, Phoenix- Mesa Gateway will compete for the same type of industrial users that prefer to be near a freeway and airport. Given its advantages in transportation access, this area has only been capturing a relatively small portion of the market. Its industrial share has always stayed between 3% and 5% and its office share has only been much higher during years when the large regional office complexes have been built. This may be because the area was also competing with Scottsdale Airpark, in which case its market share should rise as Scottsdale builds out. It will be directly competitive with Phoenix-Mesa Gateway for at least the next decade.
Desert Ridge/Paradise Ridge Desert Ridge and Paradise Ridge are located within the City of Phoenix, north of the Loop 101 freeway and west of Scottsdale Road. Currently, Desert Ridge consists of a retail mall and some residential development. Much of Desert Ridge and all of Paradise Ridge are still State Land. All of the State Land in Desert Ridge and Paradise Ridge is expected to be auctioned within the next five years. This is an important region to analyze because although it has limited history of commercial development, it is positioned to be one of the more attractive areas in Greater Phoenix.
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There is dense residential development south of the CAP canal as well as housing to the northeast. The Scottsdale Airpark is located only a few miles to the southeast as well. Over the next fifteen years, there will be more than 30,000 new homes in the area, north of the Loop 101.
Similar to Scottsdale Airpark, commercial development in this area will be located along the Loop 101, which allows access to a large employment base. While not directly located at the Scottsdale Airport, the Desert Ridge/Paradise Ridge area is in close proximity and could find some benefit from the airport being only a couple miles away. There is no rail line in this region.
Two large projects, CityNorth and Palisene, have planned capacity for several million square feet of office that can likely be expanded further if market conditions indicate that high demand. In addition, there are 1,500 acres of land south of the Loop 101 and north of the CAP Canal that are designated mixed use for commercial/commerce park. There already exist a few large buildings such as American Express offices, Sumco, and Mayo Clinic. Much of the remaining land is State Land. This area could potentially accommodate more than 15 million additional square feet of commercial development.
The Desert Ridge/Paradise Ridge area is in a very attractive location and will enjoy many of the same advantages as the Scottsdale Airpark in terms of both location and image. In fact, after the Scottsdale Airpark builds out, this region will be the first to benefit and is expected to capture a large portion of both the office and industrial markets. This area will directly compete with Phoenix-Mesa Gateway for office, business park, and light industrial users in both the short term and long term.
Phoenix-Mesa Gateway will have an advantage in attracting businesses that prefer to locate adjacent to or near an airport. Another advantage that Phoenix-Mesa Gateway may have is price. Land in Desert Ridge and Paradise Ridge is expected to continue to be very high, meaning that developers must charge higher rents for office and industrial space. A third consideration is that the majority of the commercial land in Desert Ridge/Paradise Ridge will be leased to its users by the State whereas most of the MGA is privately owned. Many developers may prefer to own the land and buildings rather than lease.
Southwest Phoenix/Tolleson The Southwest Phoenix/Tolleson region is defined by CB Richard Ellis (CBRE) as the area south of I-10, between I-17 and the Goodyear city limits. According to CBRE, there exists over 53.5 million square feet of industrial building space in that area. There is very little office development. Over the past several years this area has captured between 25% and 35% of the Metro Phoenix industrial market, mostly in the form of large warehouses some of which are greater than 500,000 square feet in size.
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The bottom line is that there is still an abundance of vacant land in this sub-region, but the primary users, such as warehousing and distribution companies, will likely be different than what planners at MGA are hoping to attract.
City of Glendale The primary competition from the City of Glendale will come from the land within the noise contours of Luke Air Force Base. Because of development restrictions within these contours, a disproportionate amount of industrial and office land is set aside within the area. This is relatively undeveloped land and will not develop until additional supply constraints begin to impact alternative locations such as along I-10 towards Buckeye. The City’s land use map is displayed below.
Map 4-2
Other Areas of Competition Other regions also display significant quantities of industrial and office land uses. However, competition, while existing, may be less direct. Peoria and Surprise are planning for large areas of industrial and office development. However, relatively weaker access to primary transportation corridors and less direct airport access will limit this development for many decades. The Florence/Merrill Ranch area is in a similar position. Regardless, the development at Phoenix-Mesa Gateway Airport is likely to cannibalize employment development in many parts of northern Pinal County. Similarly, the City of Tempe, while long a stalwart of employment development, is nearing build- out.
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One interesting area for future competition is Casa Grande. Casa Grande has significant economic assets for industrial development that are not found in any other part of Pinal County. Those include the Union Pacific Railroad, I-8, and I-10. Access to a major freeway is the most important asset for industrial development according to commercial real estate brokers and Casa Grande is well positioned to take advantage of its assets.
There will likely be a lag in time between the current population growth of the community and an increase in non-retail employment beyond what is currently enjoyed. Areas currently designated as employment use may remain vacant for a number of years before population counts are sufficient to justify the additional development. This also means that there will be significant voids in development within the center of Casa Grande for years to come under the current land use plan.
At build-out, the community could theoretically accommodate a population of one million people. Thus, workforce availability will not be an issue in the long term. Casa Grande is currently reserving approximately 6.0% of its planning area for employment uses. Reserving this amount is consistent with the experiences of some of the larger cities in Metro Phoenix.
4.2 Promoting Advantages and Discouraging Disadvantages
Within the context of competitive advantages and disadvantages, the Phoenix-Mesa Gateway Airport area appears to be favorably positioned in the long term. In the short term, however, there will be challenges. The degree of such challenges will also vary by each land use type.
The first challenge is the fact that there still remain many thousands of developable acres of industrial and office land in various parts of the Metro Phoenix area. Some of the competitor sites were addressed in the previous section. Ultimately, the Phoenix-Mesa Gateway Airport area will be “scored” by businesses based on its inherent economic attributes.
While there are general conditions that are preferred by most businesses, site selection criteria can indeed vary by type of industry. The following briefly addresses site selection criteria and also provides an outlook for various target industries.
Site Selection Criteria The Mesa Gateway Area appears to already have, or will soon have, many favorable economic attributes when it comes to site selection criteria. Being favorably positioned in these criteria will aid in attracting additional businesses and being regionally and locally competitive. One of the most noted sources for a listing of broad and general site selection factors is Area Development Magazine’s annual corporate survey. The following displays what top business leaders consider to the most important economic attributes when it comes to selection a new location. Survey results from both 2006 and 2007 are displayed.
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Table 4-1
Top 10 Site Selection Factors - 2006
1 Highway Access 2 Labor Costs 3 Avaliability of Skilled Labor 4 Government Incentives 5 High Speed Internet 6 Corporate Tax Rate 7 Construction Costs 8 Tax Exemptions 9 Access to Other Markets 10 Energy Availability and Costs
Source: Area Development Magazine
Table 4-2
Top 10 Site Selection Factors - 2007
1 Labor Costs 2 Highway Access 3 Corporate Tax Rate 4 Government Incentives 5 Telecommunications Services 6 Tax Exemptions 7 Construction Costs 8 Avaliability of Skilled Labor 9NA 10 NA
Source: Area Development Magazine
Of special note is highway accessibility. With the close proximity of a major community freeway, the area has been opened up for additional types of businesses that require access to major transportation corridors. However, for those industries that overweight this site selection factor, such as warehousing, the Mesa Gateway Area is less competitive than Buckeye and Goodyear. On the other hand, if a freeway connection is made to the south and ties into I-10 near Eloy, this competitive disadvantage may largely disappear. In fact, the proposed freeway through Florence, Coolidge and Eloy now being
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studied by ADOT would have more benefit to Mesa and the Mesa Gateway Area than any other jurisdiction.
Incentives For additional perspective, an interview was conducted with a site location expert from CB Richard Ellis. The site selection manager indicated that the provision of incentives is becoming more and more common across the country. Business parks in their early stages of development may need to induce some construction activity in the short term, at least until a critical mass is achieved and the area has been branded as a desirable and competitive location.
Initially, the City may want to pursue those incentives that have low or no cost. Or, pursue the development if incentives that have no opportunity cost (i.e. the incentive is based on activity that otherwise would not occur at the property). The following provides some perspective into incentive packages being used elsewhere. This does not represent a list of incentive recommendations. Strategic recommendations will be provided in a later memorandum.
One type of incentive that is being used in Texas provides a rebate on land costs that is conditional on the locating company remaining at the original site for multiple years. Under this condition, a company would receive a fraction of the land cost through rebate for each year it remains at the site.
Other touted incentives used by competitor locations include property tax abatement on both real and personal property. Mesa will have an advantage in that it does not have a property tax and can compete in this particular area.
The personal property tax abatement programs induce the location of base industry companies. Base industries are important because they induce the development of local market business operations. Local market businesses support the base industry companies and their employees. For example, the existence of a company such as Intel results in the development of businesses that support Intel operations. These supporting operations include suppliers of materials, local accounting services, janitorial services, etc. Furthermore, the employees of Intel and its suppliers spend money in the local economy and create demand for additional local market business operations such as restaurants, retail establishments, dry cleaners, etc. This is what is known as the multiplier effect. The multiplier effect of many of the state’s base industries tends to be quite large because wages at these firms tend to be above average. The point is that the attraction of base industry companies will result in the location of additional supporting companies.
In addition to providing specific incentives, it was noted that communities are heavily marketing their regional incentives such as a state enterprise zone program. Waivers or reduction in permitting fees are also being pursued along with fast tracking of the permitting process to induce development to occur.
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Sales tax abatement programs also appear to be popular. This could be especially valuable for those companies that may wish to invest in additional equipment locally. One final point, which may not be politically feasible, is to utilize a dedicated sales tax increase specifically for economic development. Rural communities across the country are using this to collect revenue and provide infrastructure to induce development that otherwise would not occur.
Additional reports touting long term opportunities at airport locations further identify that it is not just the businesses that are directly related to aviation that will benefit from close proximity. In addition to the usual industries such as aerospace, many types of businesses will benefit from having next day delivery options. Time sensitive and perishable products require air transportation. The ability to deliver goods quickly and safely also matches many companies desire to minimize inventory holding. All of these factors can make a business more competitive in global industries. Being more competitive also translates into being more profitable.
One end goal should be to achieve a prestigious brand name for the airport area. Under the right circumstances, the development region as a whole may become more than simply the sum of the economic development factors. The best example of this locally is the Scottsdale Airpark.
A listing of current incentive programs is as follows:
• City of Mesa “Cityshare” Cityshare is an incentive program that involves developers “overbuilding” infrastructure for an individual project that will serve other projects in the area. The City pays the difference between the required infrastructure improvements and what it would like to see built to accommodate future development needs. Thus, the initial developer is no worse off for the added infrastructure improvements and the City gains an adequate system that can serve future developments. The City is then able to charge impact fees to future developers for the infrastructure improvements to recoup the initial costs.
The potential incentive occurs when the City decides to waive the impact fee as an incentive to locate certain businesses to the area. Thus, the improvements or expansion of infrastructure are foreseen for future development and paid for by the City, and the decision to waive that improvement fee is left to the City to use as an incentive.
• Foreign Trade Zone General-Purpose Foreign Trade Zone No. 221 (FTZ) is located at Phoenix- Mesa Gateway Airport. An aviation-related business may locate within the FTZ as well as non-aviation related businesses dealing with the importation of
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foreign or domestic goods. The major benefit of locating at an FTZ is the reduction or elimination of US Customs duties and taxes on goods that have been imported into the United States. The FTZ at Phoenix-Mesa Gateway Airport includes an on-site U.S. Customs Office, a large cargo ramp and taxiway, and a cargo warehouse capable of storing any type of product.
The FTZ can act as an incentive for the types of businesses related to aviation or importing goods into the United States by air cargo. These benefits and services can act to draw these types of businesses to the Mesa Gateway Area.
• Arizona Military Reuse Zone The Phoenix-Mesa Gateway Airport was designated a Military Reuse Zone (MRZ) in 1996 with expiration in October 2016. The benefits of this designation for locating businesses include providing tax incentives to aviation or aerospace companies, insurers, and airport authorities. These three types of businesses qualify for different types of credits.
Aviation or aerospace companies can receive TPT exemptions on construction related purchases or on costs related to manufacturing, assembling, or fabricating aerospace products. There are also new job income tax credits available as well as property tax reclassifications for these types of businesses. The assessment ratio of five percent is applied to all personal and real property within the MRZ for both primary and secondary tax classifications and stays in effect for five years. Insurers can qualify for new job income tax credits as well while airport authorities can receive a TPT exemption on construction under the same guidelines as aviation and aerospace companies.
It may be important to note that any company that claims enterprise zone on an employee cannot double count them for the MRZ new employee income tax program.
While the Cityshare program is an effective way to maximize the City’s investment in infrastructure, it does require upfront investment by the City. The time value of money must then be considered when forming a decision as to the effectiveness of the initial infrastructure expansion. Depending on the timeline of future development, and due to the fiscal nature of municipal budgets, the upfront costs may become prohibitive to the project as a whole.
While the Cityshare program utilizes long term planning, the City of Mesa will still likely need to pursue no-cost incentives in the Mesa Gateway Area. The FTZ and MRZ can act as no cost incentives to the city for qualified businesses. These zones should be advertised to make these types of companies aware of potential cost savings.
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4.3 Targeting the Right Industries
Different industries will offer different location opportunities. The goal should be to match up the economic attributes of the Mesa Gateway Area with the needs of various industries. The following is a summary of the economic outlook for various industries. A “scorecard” for select major industries is provided as a synopsis of the industry summary narrative. This chart lists the specific needs of six major industries along with a scoring (i.e. A to F). This is included as an example of how all major industries should be scored and compared and contrasted to identify where to dedicate location assistance.
As part of Task 2f: Strategic Market Analysis Memorandum to be prepared by this firm at a later date, a list of target industries should be compared to the specific economic advantages and disadvantages of the Mesa Gateway Area. One distinct advantage is the location of Arizona State University’s Polytechnic Institute and the potential for some form of public/private partnering regarding workforce development. Another obvious advantage relates to the airport use. This will aid in connecting local commerce with the global economy. Advantages such as this need to be explored in more detail in later strategy memorandums.
The final economic development strategy should focus where the industry outlook matches with the area’s advantages. Of course, both ultimately need to match the City’s vision of the area. The development of the vision in consideration of the area’s opportunities will also aid in the development of a successful plan.
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Table 4-3
Summary Table – Example Industry Scorecard
Industry/Grade Products Expansion Opportunities Resource Needs Risks
Biomedical/ Medical devices, Strong overall job Highly skilled State as a bio-chemical growth and output labor. whole lags in Biotech products, potential. Near other like field but is pharmaceutical Currently in growth businesses. improving. preparation, other stage. Reliable source Need critical bio-research. Excellent incubator of energy. mass of participant. companies for Benefit from proximity expansion. to ASU. Demographics.
Grade: B+ Environmental Pollution control, Strong growth potential Skilled labor, International Technology waste in energy & resource mainly for markets are management, site recovery, other services. engineering, unpredictable. remediation, Environmental technical State lags in engineering and management and services. exports. consulting information services in Access to services, growth stage. international recycling, International markets. markets. resource recovery, etc. Grade: B Telecom- General Slow to moderate Access to high Domestic munications telephone overall growth, but data bandwidth data wireless equipment and market/computer lines. market may be services, networking has excellent Reliable source saturated. computer growth potential. of energy. Slow job network Data hotels. Very specific growth in data equipment and International market still data center equipment services, fiber good for wireless. housing. sector. optics, wireless equipment and services, satellite Grade: B- and transmission equipment and services. High-Tech Aerospace, Very strong growth in Software and Current computer high-tech services. other computer slowdown in equipment and Long-run growth in services require computer services, computer equipment. highly trained equipment. microelectronics, Strong growth in labor. Weak software software development, Microelectronics international technology, other particularly for manufacturing software electronics engineering software. places additional copyright laws. equipment and Candidates for weight on low services. incubators. cost labor. Limited large expansion Grade: A- opportunities for capital intensive industries like aerospace. Entertainment/ Movies and Benefits from additional Population Market Tourism television, state sponsored tourism growth. saturation. amusement advertising. Good weather. Subject to parks, sporting Follows population Healthy economic events, travel growth; AZ is one of economy. cycles. Grade: B related products, national leaders. restaurants, Good climate. hotels, etc.
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Finance/ General financial Large industry that Telecom- Dominated by Business institution supports all other munications large firms, Services services, business. infrastructure. thus reducing accounting, Firms related to real Skilled and opportunities auditing, estate industry are affordable labor. for expansion. bookkeeping, potential expansion Proximity to advertising, legal, targets. customers not management, real Identified need for as important. estate, credit, etc. optical recording media and travel services.
Grade: C
Aerospace & Defense The commercial aircraft segment of the industry is expected to realize strong growth of 5.3% over the next two decades due primarily to developing countries’ increasing ability to expand their aircraft fleets and the impending retirement of around 8,300 aircraft. Profitability and earnings growth potential are driven by demand trends in this industry.
Standard & Poor’s industry survey predicts that over the next several years, growth in the defense industry is projected to be near or below the rate of growth in the real global domestic product. The company predicts defense industry revenues to appreciate between 5% and 6%, and profits to appreciate between 8% and 11% over the next two or three years.
The commercial space market is expected to grow at moderate rates over the next ten years, driven mostly by demand for newer types of media and communication such as high definition television and broadband applications for satellites.
A 5% to 7% long term average annual growth rate is predicted in the military space market, although profit margins are expected to remain in the 6% to 8% range. In the non-defense government and scientific markets, revenues are predicted to grow at a long- term average annual rate of 3% to 4% at best, with low operating profit margins.
While the industry is expected to post only moderate rates of growth, this is indeed a segment of the economy that could benefit from locating at an airport site. Therefore, this industry should continue to be a major focus in terms of location planning.
Agribusiness In 2006, U.S. revenues in this industry totaled $242.7 billion. The main drivers for growth in the agribusiness industry are demand for organic food, rising income levels worldwide, and innovation in alternative fuel using crops such as corn and soybeans. The recent alternative fuel trend is raising prices for corn, soybeans and their substitutes causing growers’ profit margins to rise. At the same time, meat and dairy producers who rely on grains for feed are seeing their profit margins shrink. Rising incomes in developing countries are increasing the demand for U.S. agribusiness exports, especially meat. This is causing growth in the meat production industry but also makes it dependant
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on foreign countries’ policies and tastes. Dairy is not a significant export, and is not expected to grow significantly but may face consolidation in the next several years. Organic food sales are growing much faster than food overall and this trend is expected to continue.
Because of changing technologies and the use of agriculture products as fuel, this industry could have a very interesting long term future and should be vigorously pursued.
Biotechnology In 2006 revenues from publicly traded biotech companies totaled around $73.4 billion, up 14% from 2005. A similar growth rate is expected over the next few years. Revenue growth is predicted to be in the mid teens through 2008. The biotechnology market is almost completely independent of general economic activity, and Standard & Poor’s expects growth in the biotech industry to be driven by the potential for substantial profits, the aging of the population, and economic growth in the developing world. Treatments for cancer and related conditions are expected to be the main long term growth drivers in the industry. Although the industry as a whole is unprofitable since research and development costs outweigh revenue, a few well established companies arte able to make a net gain.
This is a prime industry to pursue for several reasons. First, the State of Arizona is already taking the lead in attracting businesses. However, the focus is on attracting the businesses to Downtown Phoenix. Under the right conditions, some of this could spill over into Mesa. Second, since the State is likely to attract a disproportionate number of retirees in coming years, the production and/or distribution of goods related to aging will be increasing in importance. The risk is that it takes many years and significant incentives to develop a critical mass of biotech companies. Rather than induce its own core, Mesa may wish to “piggyback” on the State’s efforts and focus on attracting a portion of any statewide expansion.
Chemicals The chemical industry is one of the largest segments of the U.S. economy with nearly one million people employed domestically. The industry accounts for approximately 2% of the country’s GDP. In 2006, the chemical industry as a whole had revenues of $709 billion, up 12% from the previous year.
Standard & Poor’s is cautiously optimistic that industry profits will increase in 2007. After the end of the year, profits are predicted to begin a gradual decline, hitting a cyclical bottom at the end of the decade. Chemical industry revenue growth is driven by volume growth and price flexibility. Product mix, raw material costs, capacity utilization and efficiency all help to determine profitability. Key end uses for chemicals include the home construction, automobile, and manufacturing industries. The U.S. market for chemicals is considered mature at this time. In the years ahead, Standard & Poor’s predicts that U.S. domestic chemical sales will grow at about the same rate as real GDP. This does not appear to be a prime industry for location targeting.
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Communications Equipment Standard & Poor’s gives a neutral outlook for this industry. The industry has strong prospects for growth, especially in developing countries without much infrastructure currently in place. This factor may be offset by the competition the industry faces.
The communications equipment industry as a whole is primarily driven by corporate information technology spending and telecommunications expenditures. The health of the economy overall is another driver for the communications equipment industry.
Currently, voice traffic is the main source of revenue for communications firms, but data traffic is an important driver of future growth. Mid single digit growth is predicted industry-wide for the next few years.
There may be limited opportunities for attracting businesses in this industry. However, if a cluster can be formed, the long term outlook is favorable.
Computers: Storage & Peripherals The storage services market is driven by the growing need to manage increasingly complex and large types of data. The disk storage system segment of the market is expected to see 4.0% growth between 2006 and 2010, leading to revenues of $30.5 billion. Compared to hard disk drives, flash memory has lower power consumption, quicker access and smaller form factors, but has historically been prohibitively expensive for most uses other than small consumer electronics. Worldwide shipments of flash memory cards are expected to rise at a compound annual growth rate of 38% between 2005 and 2010. Recent and future growth is expected to be most significant in the low- end, small/medium business sector. Between 2006 and 2011 sales in the low-end segment are expected to enjoy an annual growth rate of 21.0% while the mid-range segment grows 9.2% a year and the high end portion declines 2.0% annually.
Small computer storage devices are excellent examples of high value added products that are lightweight and subject to air shipments. This market should be pursued.
Electric Utilities The US electric industry is relatively mature. Demand growth in the US moves along with growth in the gross domestic product. Standard & Poor’s predicts that technology advancements, desire for customer choice and more prudent regulation will lead to a more competitive market. Standard & Poor’s predicts that the industry as a whole and the individual companies in the industry will remain volatile over the next several years. Currently, the government regulates rates utilities are allowed to charge which are intended to allow companies to raise necessary financing, recover their fixed costs over time and allow for some return on investment. Standard & Poor’s expects the industry to benefit from a strong economy in 2007, but earnings may be impaired by a high level of costs.
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Given the planning desires for Phoenix-Mesa Gateway Airport, merchant utilities may not be a good fit at the subject site.
Healthcare: Pharmaceuticals Standard & Poor’s predicts the outlook for the industry as a whole to remain stable to slightly positive between 2007 and 2010. Between 2010 and 2012, however, name-brand pharmaceuticals may suffer as a record wave of patent expirations occurs. Volume growth is predicted to be driven by the increasing size of the elderly demographic as well as higher standard of living globally.
Nearly every large U.S. pharmaceutical company will see its top two products face competition beginning in this period. Standard & Poor’s believes that the most successful firms will be those that can continuously offer the most breakthrough therapeutic products and remain cost effective.
Similar to biotech research, seeking additional local pharmaceutical production and/or distribution appears to be reasonable.
Household Nondurables The U.S. household nondurables market is relatively mature and saturated, with minimal volume growth prospects. Significant growth is projected to occur in new markets and, in the U.S., in specialty areas such as anti-aging products and natural products.
Standard & Poor’s predicts consumer spending on nondurables to rise 2.7% in 2007 and 3.0% in 2008. Volume will be driven by new product introductions and product upgrades rather than population growth. The volume of household nondurable products is relatively stable in times of economic recession and prosperity since these products are generally perceived as necessities. However, the price consumers are willing to pay is highly elastic.
Manufacturers of household nondurables must engage in research and development to keep a steady stream of new products. Successful new products generally carry a higher profit for manufacturers than older products, and help companies earn and keep market share. This is also an industry that should be pursued.
Metals: Industrial The U.S. industrial metals industry consists almost entirely of aluminum and steel production. Growth in the industrial metal industry as a whole is driven mainly by economic growth and demand is highly sensitive to whether the economy as a whole is growing or declining. Both steel and aluminum are heavily dependant on cyclical markets such as those of automobiles and construction. The steel market is considered mature, with limited secular growth potential, so market share is critical for steel producers. Aluminum is mainly featured in consumer products and the industry is mainly driven by economic growth. Increased economic growth in the world as a whole is
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expected to contribute to demand for aluminum in the near future. This is not a strong industry to pursue at this time.
Retailing: Specialty In the first four months of 2007, specialty retail accounted for approximately 86% of the $1.26 trillion of U.S. retail sales. Due to the limited range of products offered by any one specialty retailer, the industry as a whole is relatively independent of broad macroeconomic and retail trends, but still partially affected by changes in consumer spending, but specialty retailers are generally highly susceptible to changing demographics, tastes and preferences of consumers. Strong growth in personal income tends to increase consumer spending in general, and weak or nonexistent personal income growth can reduce consumer spending.
Some of the most successful specialty retailers are large and well established chains. Giant superstores known as “category killers” can carry a broad variety of products within a type of product such as car parts of consumer electronics and out-price smaller competitors. Standard & Poor’s rates the outlook for the specialty retailing industry as a whole as neutral. The rating for home improvement, luxury goods, electronics and some apparel retailers is positive, but rising interest rates, a weakening housing market, and a negative consumer saving rate will reduce spending on furnishings and other segments.
While the overall industry outlook is neutral, fast growing communities will realize significant growth as the population base expands. This may be one area that does not need to be pursued. Instead, the attraction of these businesses will arise from the attraction of people and base industry operations.
Semiconductors In 2006, the global semiconductor industry achieved nearly $248 billion in sales; however, the beginning of 2007 saw revenue generally declining. Established firms in this industry typically enjoy strong revenue growth and high levels of profitability. The semiconductor industry is characterized by quick obsolescence and rapidly falling prices. Historically, semiconductors were mainly used in computers, but now computer products account for only about 40% of demand for semiconductors. The main growth driver is consumer electronics such as cell phones and games. The market for consumer electronic products is still growing, but nearing maturity. Between 2005 and 2010, Standard & Poor’s predicts a 5.4% compound annual growth rate for the industry as a whole. Growth is dependant on the performance of the end markets for semiconductors such as PCs, mobile phones and other electronics.
The difficultly with attracting semiconductor production to Phoenix-Mesa Gateway Airport is the fact that excess production capacity already exists in the Metro Phoenix area. While opportunities should be pursued as they arise, excessive efforts to attract this industry to the area may be inefficient.
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Semiconductor Equipment Standard & Poor’s predicts global chip equipment sales to reach $40.6 billion in 2007, down 3.2% from 2006. In 2008 revenue is expected to rise 14.9% to $46.7 billion. Growth in the semiconductor equipment industry tends to follow growth in the semiconductor industry itself. Because of this reliance on diverse end uses and the long lead times involved in the industry, equipment manufacturing is very volatile and unpredictable. Standard & Poor’s overall outlook for the semiconductor equipment industry is currently negative. In the short term, Standard & Poor’s believes that the semiconductor equipment industry will suffer due to lackluster demand. This weakness is expected to extend through the first half of 2007, but growth may occur in the second half of the year.
Similar to above, excess equipment already exists in the local market.
Telecommunications: Wireless & Wireline The wireless telecommunications industry is in a growth phase nearing maturity. The market penetration rate is around 72%, considerably lower than the rates of several other countries in Western Europe and Eastern Asia. There is still room to increase the number of subscribers in the U.S., and even more so in emerging markets. Currently, wireless telecommunications revenue growth is driven more by new features than by new customers. Applications on phones such as music, television, internet, and games are gaining in popularity and feasibility, and are a profitable feature for carriers. These functions are currently gaining popularity and affordability.
Prepaid phone plans are another segment that is expected to see higher than industry average growth in the future. Standard & Poor’s gives a positive outlook for the wireless industry based on their potential for subscriber and revenue growth.
The wireline telecommunications industry is a mature market characterized by intense competition and slowing demand. It is facing competition not only internally, but also from wireless providers and from technologies such as VoIP, cable, and even wireline broadband products. The traditional voice service segment of the market is losing ground to this competition.
Wireline telecommunications firms are branching and merging into the wireless industry. Carriers that can offer customers all the main telecommunications services, including voice, data, and video, in one package have a significant advantage over their competitors.
Standard & Poor’s overall outlook for the wireline telecommunications market is stable. Despite competition within the wireline industry and from outside, well established carriers are positioned to benefit from increasing demand for telecommunications services other than voice.
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Location opportunities in this industry may be few and far between during the next several years.
Transportation: Commercial Standard & Poor’s estimates that of every dollar of U.S. GDP, 5.9 cents was spent on commercial transportation by truck, train, or plane in 2005. Trucking accounts for the majority of freight transportation in the U.S. by value, followed by rail. In the U.S., 43% of rail tonnage is accounted for by coal shipments, almost all of which is used to generate electricity. The demand for coal is a strong driver for rail demand, and due to high prices for coal substitutes, coal demand is likely to remain strong.
Air freight accounts for comparatively little tonnage, but has relatively high revenue due to the express-shipping nature of the mode and use on smaller electronics that are of high value. The rising importance of international freight continues to drive the air cargo industry. Growth and profitability in every mode of commercial transportation is dependant on the economy, fuel prices, and the labor market. Demand for transportation follows the overall GDP as well as international demand. It is especially sensitive to retail sales. The commercial transportation market is very volatile and cyclical. It tends to magnifying four or five times changes seen in the GDP.
Clearly, Phoenix-Mesa Gateway Airport planners should pursue this industry to the extent that any opportunities arise.
4.3 Rail Service
Much discussion has ensued regarding the Union Pacific rail line that cuts across the southwestern end of the Mesa Gateway Study Area. The following research was initiated to determine if this rail line is a true asset for development of the Mesa Gateway Area or if it has limited potential.
Arizona is served by two rail companies, the Union Pacific (UP) and the Burlington Northern Santa Fe (BNSF) Company. There are two Class 1 railroads in the State, one in the northern portion generally following I-40 and one in the south generally following I- 10 and I-8. BNSF owns the northern line while UP owns the southern one. A map of each with branch or local lines is provided below. There are also two major switching stations in the state and six local lines.
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Map 4-3
Union Pacific Rail System
Map 4-4
Burlington Northern Santa Fe Rail System
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The BNSF lines enter the Phoenix area from the northwest along Grand Avenue and provide service throughout Glendale and Surprise. The above map shows the location of an intermodal hub in Glendale along Grand Avenue. The UP rail lines provide service throughout the Southeast Valley, central and southwest Phoenix through to Buckeye.
Union Pacific is planning to build the nation’s 6th largest switchyard near Eloy and Picacho Peak in Pinal County, Arizona. It will be called the Red Rock Yard. The switchyard would be along the company’s Sunset Route, connecting Los Angeles, El Paso, Houston and New Orleans. It would process between 800 and 1,000 cars each day and would become the central hub for Arizona. The Red Rock Yard will contain a limited fueling station and no loading or unloading capabilities as it is not an intermodal facility. It will be similar to Louisiana’s Livonia Yard in size and type. The rail yard would bring 290 jobs to the area. Of these jobs 200 to 230 would be relocated from Tucson and 60 to 90 would be new.
Located between Phoenix and Tucson, this switching yard would complement existing switchyards in those cities which are currently operating at capacity. Rail transport accounted for 23.4% of Arizona’s outgoing shipments in 1997, with a cargo value of $3.58 billion dollars. Over the last decade, the percentage of the nation’s freight being shipped by railroad is increasing. In 2004, 36.8% of all ton-miles of freight were shipped by train. The main commodities being exported from Arizona are glass and stone products, while the main import is coal as shown in the following table. It should be noted that on a weight basis, rail carries more freight than any other mode. However, the freight tends to be bulky commodities and include the following:
• Agricultural products: grains, wheat and flour • Refrigerated products: beer, fruit, vegetables, potatoes • Chemicals: LPG, petroleum, plastics • Industrial Products: construction material (bricks, cement, sand, shingles, stone), lumber, wallboard, plywood, metals (aluminum, copper, iron and steel), and paper products (newsprint, scrap paper).
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Chart 4-1
Ton-Miles of Freight Source: Bureau of Transportation Statistics
50.0%
45.0%
40.0%
35.0%
30.0%
25.0%
20.0% Percentage of Freight 15.0%
10.0%
5.0%
0.0% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Year
Railroad Truck Other
Table 4-4 Arizona Rail Shipments 2000
To Arizona From Arizona Commodity Short tons % of Total Commodity Short tons % of Total Coal 11,351,213 45.9% Glass & stone products 1,433,216 24.6% Glass & stone products 1,895,112 7.7% Metallic Ores 935,096 16.0% Chemicals 1,804,376 7.3% Primary metal products 847,620 14.5% Farm products 1,506,564 6.1% Waste & scrap material 544,928 9.3% Lumber & wood products 1,358,880 5.5% Chemicals 423,472 7.3% All other 6,787,972 27.5% All Other 1,647,591 28.3% Total 24,704,117 100.0% Total 5,831,923 100.0%
Source: Bureua of Transportation Statistics Arizona Transportation Profile
For the proposed switching yard, Union Pacific will attempt to purchase 1,500 acres of land from the State Land Department at auction early in 2008. The switchyard itself will take up about 600 acres of this land, with the extra land being held for possible expansion and as a buffer to the surrounding area. Union Pacific has been looking for a site in Arizona to place a new rail yard for three years, and this is the best site they have found. Other sites had land that was not flat enough or had other land uses such as schools nearby that made the switchyard use incompatible. The facility will cost Union Pacific
79 Task 2d: Current Trends Economic Base Memorandum around $188 million to build including land acquisition and construction. If the land is acquired successfully, construction will begin in 2009.
The presence of the rail line adjacent to Phoenix-Mesa Gateway Airport has some potential to provide intermodal transportation activity. Alliance Airport in Fort Worth, Texas has a large switching yard operated by UP only a few miles away. Large warehouse operations have been developed in the area, but the interaction between rail and the airport is limited.
Landowners and developers who have studied the rail line potential have come to the conclusion that rail has limited potential for economic development of the Mesa Gateway Area Reasons cited for this conclusion are as follows:
• There is little if any interaction between rail and air freight, since rail carries bulky, low value product and air freight carries small, high value goods. There is little nexus between the two. • UP has extensive regulatory policies. • UP is requiring the construction of a minimum 6,000 foot long siding along its main line at developer expense to provide rail service to any properties in the area. They desire to see at least 500 acres of rail-served property before committing to serve the area. They will not serve individual properties.
Given these reasons, developers in the area have chosen to forego developing any rail- served lots or buildings due to the expense and risk of the venture. Plus there seems to be little connection between the airport and rail freight. For the most part, rail-served property is already located in southwest Phoenix where it functions in concert with the nearby trucking industry. At least for the near-term, a rail component to the Mesa Gateway Area economic strategy does not appear feasible.
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5.0 Examples of Development Sequencing
In order to form an educated opinion regarding the development configuration and timing for the Mesa Gateway Area, development patterns and sequencing at other business parks were reviewed. The historical development patterns at select sites are provided below.
5.1 Scottsdale Airpark
Historical development sequencing at the Scottsdale Airpark was gathered to provide perspective into how a notable and relatively successful airport business park changed over time.
Development Patterns The following chart compares the total inventory of office and industrial space at the Scottsdale Airpark from 1980 through 2006. The airpark took off in the mid 1980’s which corresponds with an overall building boom that occurred throughout the country. However, during the real estate recession that began in the late 1980’s through 1996 relatively little space was constructed in the area.
The next wave of development began in 1997 and continues though today. Despite the airpark primarily serving smaller scale aviation operations that do not require massive space, approximately 9 million square feet of industrial space exists at the facility. Extensive office development also began in the late 1990’s. Office development is normally expected to occur later than industrial development and the Scottsdale Airpark developed in a similar fashion. On the other hand, office development at the airpark has been very robust of late, reaching nearly 8 million square feet of space as of 2006.
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Chart 5-1
Office and Industrial Square Feet Inventory 1980-2006 Scottsdale Airpark Source: Kammrath & Associates
10,000,000
9,000,000
8,000,000
7,000,000
6,000,000
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
0
83 88 93 1980 1981 1982 19 1984 1985 1986 1987 19 1989 1990 1991 1992 19 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Office Industrial
The movement from industrial development to office development is even more evident if the following chart. The display identifies the number of square feet of both office and industrial space that was constructed each year since 1980. While industrial development still exceeds office development in total square feet of space, significantly more office space has been constructed during the current decade.
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Chart 5-2
Office and Industrial Square Feet Constructed 1980-2006 Scottsdale Airpark Source: Kammrath & Associates
1,200,000
1,000,000
800,000
600,000
400,000
200,000
0
99 988 1980 1981 1982 1983 1984 1985 1986 1987 1 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 19 2000 2001 2002 2003 2004 2005 2006
Office Industrial
Relative Development Patterns Another valuable method of analyzing development at the airpark is to view the percent of all Maricopa office and industrial construction that has occurred at the site. In terms of cumulative space, the Airpark has represented no more that 3.5% of the countywide industrial market. However, office space at the airpark has increased from less that 2.0% of the total county market to approximately 6.5% of the market. This significant increase in market share is the result of the airpark attracting nearly 15% of the countywide office market since 1996. This information if graphically portrayed in the following two charts.
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Chart 5-3
Office and Industrial Square Feet Inventory Percent of Total Maricopa County 1980-2006 Scottsdale Airpark Source: Kammrath & Associates
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0% 3 8 982 992 993 1980 1981 1 19 1984 1985 1986 1987 1988 1989 1990 1991 1 1 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Office Industrial
Chart 5-4
Office and Industrial Square Feet Constructed Percent of Total Maricopa County 1980-2006 Scottsdale Airpark Source: Kammrath & Associates 30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
6 2 8 0 993 997 1980 1981 1982 1983 1984 1985 19 1987 1988 1989 1990 1991 1992 1 1994 1995 1996 1 1998 1999 2000 2001 20 2003 2004 2005 2006
Office Industrial
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Conclusions – Scottsdale Airpark Even though the Scottsdale Airport/Airpark is somewhat unique in terms of its overall character, the development sequencing very closely matches general expectations. First, the area attracted industrial operations that directly, or indirectly, benefit from proximity to an airport. Second, once the area was surrounded with a critical mass of workers, additional office enterprises developed. Third, the development potential of the location was expanded with the construction of the Loop 101 freeway. Fourth, and all encompassing, the development pattern followed the status of the overall economy.
5.2 Tempe
Tempe has been historically impressive in terms of its jobs to population ratio and amount of both industrial and office space construction, both in percentage and absolute terms. Factors that contribute to Tempe’s success include being located near Phoenix Sky Harbor airport, and is thus a part of this report’s discussion in terms of qualitative attributes conducive to successful growth in these markets.
Development Patterns The following chart compares the total inventory of office and industrial space in Tempe from 1980 through 2006. The city maintained healthy industrial space growth through the mid 1980’s keeping up with the overall trend throughout the country, though office space growth remained relatively flat. During the real estate recession that began in the late 1980’s, both types saw virtually no growth.
The next start-up began around 1995 and continued until about 2002. Since then, development was still taking place, but at a slower pace than it had previously experienced. Approximately 34.3 million square feet of industrial space can be found in the City of Tempe. Office development followed the normal trend of trailing industrial development. In terms of office space inventory, Tempe has over 10.1 million square feet as of 2006.
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Chart 5-5
Office and Industrial Square Feet Inventory 1980-2006 Tempe Source: Kammrath & Associates
35,000,000
30,000,000
25,000,000
20,000,000
15,000,000
10,000,000
5,000,000
- 86 88 99 03 990 994 001 005 1980 1981 1982 1983 1984 1985 19 1987 19 1989 1 1991 1992 1993 1 1995 1996 1997 1998 19 2000 2 2002 20 2004 2 2006
Office Industrial
Unlike the Scottsdale Airpark, Tempe development patterns remain largely dominated by industrial space. An additional portrayal of this development pattern can be seen in the following chart.
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Chart 5-6
Office and Industrial Square Feet Constructed 1980-2006 Tempe Source: Kammrath & Associates
2,700,000
2,400,000 2,100,000
1,800,000
1,500,000
1,200,000
900,000
600,000
300,000
0 98 00 02 989 991 004 006 1980 1981 1982 1983 1984 1985 1986 1987 1988 1 1990 1 1992 1993 1994 1995 1996 1997 19 1999 20 2001 20 2003 2 2005 2
Office Industrial
Relative Development Patterns In terms of cumulative space, Tempe has represented about 13% of the countywide industrial market over the last 16 years. Office space has increased from 6.5% of the total county market to nearly 8.5% of the market. Tempe has experienced some significant office space growth in singular years in the period from 1980 to 2006, and had strong, consistent growth from the mid 1990’s to early 2000’s. This information is graphically portrayed in the following two charts.
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Chart 5-7
Office and Industrial Square Feet Inventory Percent of Total Maricopa County 1980-2006 Tempe Source: Kammrath & Associates
18.0%
16.0%
14.0% 12.0%
10.0% 8.0%
6.0%
4.0%
2.0%
0.0% 84 90 97 98 03 04 983 989 1980 1981 1982 1 19 1985 1986 1987 1988 1 19 1991 1992 1993 1994 1995 1996 19 19 1999 2000 2001 2002 20 20 2005 2006
Office Industrial
Chart 5-8
Office and Industrial Square Feet Constructed Percent of Total Maricopa County 1980-2006 Tempe Source: Kammrath & Associates
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
88 99 02 981 991 995 005 1980 1 1982 1983 1984 1985 1986 1987 19 1989 1990 1 1992 1993 1994 1 1996 1997 1998 19 2000 2001 20 2003 2004 2 2006
Office Industrial
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Conclusions – Tempe The development sequencing for Tempe again matches general expectations, but to a slightly different degree than what occurred in Scottsdale. First, the area attracted industrial operations that directly or indirectly benefit from proximity to an airport. Next, additional office enterprises developed. Third, the development pattern followed the status of the overall economy.
5.3 Deer Valley Airpark
Historical data found for the Deer Valley Airpark area are illustrated below. Deer Valley Airpark is considered similar in its locational attributes when compared to Scottsdale Airpark. The airport itself is relatively small, but favorably located near both the Loop 101 freeway and the I-17. Notable tenants of office and industrial space are found in the area including Honeywell, Discover Card, American Express, and the fairly recent construction of the USAA campus.
Development Patterns For the most part, development has been steady and consistent with the areas population and employment growth. Office construction suffered a period of no growth in the early 1990’s, but both types have enjoyed higher rates of development since 1997 through today.
Deer Valley Airpark has been similar to other areas in its construction growth since the mid to late 1990’s. It differs from Scottsdale Airpark in that it is still experiencing higher rates of industrial growth compared to office. As of 2006, approximately 10.0 million square feet of industrial space can be found around Deer Valley Airpark. Office development has reached over 5.5 million square feet as of 2006.
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Chart 5-9
Office and Industrial Square Feet Inventory 1980-2006 Deer Valley Airpark Source: Kammrath & Associates
12,000,000
10,000,000
8,000,000
6,000,000
4,000,000
2,000,000
0 91 00 01 990 002 003 004 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1 19 1992 1993 1994 1995 1996 1997 1998 1999 20 20 2 2 2 2005 2006
Office Industrial
The next display identifies the number of square feet of both office and industrial space that was constructed each year since 1980. Industrial construction has largely dominated office construction, experiencing only one year (1992) of stagnant growth. This may be explained by the previous description of the development sequence. By taking Deer Valley Airpark’s geography and demographics into consideration, a sufficient employment base north of the 101 freeway is not seen.
Deer Valley Airport is surrounded by unreleased State Land that cannot yet be developed. This may change in the years to come with the continued development of Desert Ridge and Paradise ridge. As north Phoenix and North Scottsdale regions continue to develop, both the Deer Valley Airpark and Scottsdale Airpark will benefit in the areas of office development. Also, Deer Valley Airpark may be in place to capture future office development as Scottsdale Airpark nears capacity in the not too distant future.
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Chart 5-10
Office and Industrial Square Feet Constructed 1980-2006 Deer Valley Airpark Source: Kammrath & Associates
1,200,000
1,000,000
800,000
600,000
400,000
200,000
0
81 82 83 84 85 86 87 89 91 92 93 94 96 97 98 99 00 01 02 03 04 06 9 9 0 1980 19 19 1 19 19 19 19 1988 19 1990 19 19 1 19 1995 19 19 19 19 2 20 20 20 20 2005 20 Office Industrial
Relative Development Patterns Deer Valley Airpark has represented a relatively small portion of the county-wide industrial and office market over the last 16 years. Office space has made a drastic improvement in that there was no office space in the area before 1981. Thus office inventory has increased from 0.0% of the total county market to nearly 5.0% of the market as of 2006. There have been years in which Deer Valley Airpark has captured over 20% of office construction. Industrial capture typically hovered around 3.0% of the market until the late 1990’s. It has since steadily increased to currently capturing nearly 4.0% of all of Maricopa County industrial inventory. Industrial construction has consistently captured 5% to 10% of total industrial construction from year to year. This information is graphically portrayed in the following two charts.
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Chart 5-11
Office and Industrial Square Feet Inventory Percent of Total Maricopa County 1980-2006 Deer Valley Airpark Source: Kammrath & Associates
5.0%
4.5%
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
83 89 90 02 984 996 997 003 1980 1981 1982 19 1 1985 1986 1987 1988 19 19 1991 1992 1993 1994 1995 1 1 1998 1999 2000 2001 20 2 2004 2005 2006 Office Industrial
Chart 5-12
Office and Industrial Square Feet Constructed Percent of Total Maricopa County 1980-2006 Deer Valley Airpark Source: Kammrath & Associates
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
80 81 82 83 84 85 86 87 89 90 91 92 93 94 95 96 97 98 00 01 03 04 05 06 9 9 9 0 19 1 19 19 19 19 19 19 1988 19 19 1 19 19 19 1 19 19 19 1999 20 20 2002 20 20 2 20
Office Industrial
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Conclusions – Deer Valley Deer Valley Airpark may be in place to capture future office development with its location along a major freeway interchange and proximity to central areas of development as Scottsdale Airpark nears capacity in the not too distant future.
5.4 Falcon Field
Development Patterns The following chart compares the total inventory of office and industrial space in the Falcon Field area from 1980 through 2006. The airpark realized a huge boost to its industrial inventory with the addition of the Boeing Center in the early 1980’s. During the real estate recession that began in the late 1980’s, both types of development saw virtually no growth, as is observed in nearly every area.
The airpark began seeing development again in 1997, mostly in industrial space. However, office space has increased over the last few years. The continued development of the Loop 202 and increased residential development in far East Mesa has likely helped spur this development. Chart 5-13
Office and Industrial Square Feet Inventory 1980-2006 Falcon Field Source: Kammrath & Associates
4,000,000
3,500,000
3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
-
80 81 82 83 84 85 86 87 88 89 91 92 93 94 95 96 98 99 00 01 02 03 05 06 9 9 9 0 19 19 19 1 19 19 19 19 19 1 1990 19 19 19 19 19 1 1997 19 19 20 20 20 2 2004 20 20 Office Industrial
Industrial development continues to outperform office construction in the area. The following chart identifies the number of square feet of both office and industrial space that was constructed each year since 1980.
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Chart 5-14
Office and Industrial Square Feet Constructed 1980-2006 Falcon Field Source: Kammrath & Associates
1,600,000
1,400,000
1,200,000
1,000,000
800,000
600,000
400,000
200,000
0
81 82 83 84 85 86 87 89 91 92 93 94 96 97 98 99 00 01 02 03 04 06 9 9 0 1980 19 19 1 19 19 19 19 1988 19 1990 19 19 1 19 1995 19 19 19 19 2 20 20 20 20 2005 20 Office Industrial
Relative Development Patterns Falcon Field still only represents a nominal share of industrial and office inventory throughout Maricopa County. The development of the Boeing center has allowed Falcon Field to capture close to 1.5% of the total market, while office space is only beginning to take a share of the market at 0.5% as of 2006. The year to year construction capture has been increasingly noticeable, especially in the last two years. Falcon Field was able to capture 7.5% of total industrial development in 2006, while office development captured just over 5.5% of the market. This is illustrated in the displays on the following page.
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Chart 5-15
Office and Industrial Square Feet Inventory Percent of Total Maricopa County 1980-2006 Falcon Field Source: Kammrath & Associates
2.0%
1.5%
1.0%
0.5%
0.0%
83 89 90 02 984 996 997 003 1980 1981 1982 19 1 1985 1986 1987 1988 19 19 1991 1992 1993 1994 1995 1 1 1998 1999 2000 2001 20 2 2004 2005 2006 Office Industrial
Chart 5-16
Office and Industrial Square Feet Constructed Percent of Total Maricopa County 1980-2006 Falcon Field Source: Kammrath & Associates
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
88 99 02 981 991 995 005 1980 1 1982 1983 1984 1985 1986 1987 19 1989 1990 1 1992 1993 1994 1 1996 1997 1998 19 2000 2001 20 2003 2004 2 2006
Office Industrial
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Conclusions – Falcon Field Falcon Field seems to still be in its infancy in regards to its development sequence. The construction of the Boeing facility in the 1980’s, which added approximately 1.5 million square feet to Falcon Field’s industrial inventory, was an aberration to the overall trend. The further growth of East Mesa is certainly a potential source for additional development at Falcon Field. However, Falcon Field may lag behind other locations fir large scale locations.
5.5 Labor Shed Analysis
One of the most important determinants of the growth of an employment center is proximity to an available labor force. Participation in the labor force varies by geographic subregion and depends upon the age of the population, household composition, seasonal/retirement population and other factors. The following table shows the relative size of the population and labor force for several current or future employment centers in the metro area.
Table 5-1 Population and Labor Force Analysis For Select Areas1/
Population Labor Force
Radius (Miles) 2000 2007 2012 2000 2007 2012
Mesa Gateway Area 5 40,471 106,606 150,213 18,783 49,476 69,714
10 386,799 595,881 735,353 179,576 276,645 341,397
Scottsdale Airpark 5 163,617 179,622 203,047 90,068 98,878 111,773
10 490,079 541,551 615,927 267,410 295,496 336,079
Deer Valley Airport 5 238,156 265,246 302,029 134,705 150,028 170,833
10 812,450 909,358 1,032,329 433,005 484,653 550,192
Sky Harbor Airport 5 294,744 337,930 384,445 136,447 156,439 177,973
10 1,060,717 1,189,810 1,338,088 527,969 592,224 666,029
Westgate Area 5 238,873 301,111 350,626 108,752 137,087 159,629
10 858,581 1,103,259 1,295,956 387,697 498,182 585,196 ______1/ Years 2007 and 2012 data are forecasted by ESRI. Source: Hanley Wood, ESRI, Elliott D. Pollack & Co.
As noted above, the labor force within five miles of the Mesa Gateway Area is significantly less than other employment centers. The ten mile radius is roughly equivalent to Scottsdale Airpark as forecasted in 2007 and 2012, but significantly less than other major centers. This is a significant challenge that will affect development of employment in MGA for the near term. It explains to some extent why job growth has occurred slowly over the past ten years in MGA and points to the fact that additional population and work force is needed in close proximity to attract employers. Some of the future growth of the labor force could occur within the MGA boundaries, but additional population growth in Pinal County will also be a contributing factor to making MGA a major employment center in the region.
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6.0 Perceptions of the Development Community
In order to determine the perspective of the commercial development industry with respect to the future employment (office/industrial) demand for the Mesa Gateway Area, Elliott D. Pollack & Company engaged Lee & Associates Arizona to conduct interviews of developers of employment real estate and land investors. The Lee & Associates team talked with a diverse group of over 20 office developers, industrial developers & land investors. The developers included those with existing positions in the study area as well as those without position. Lee & Associates wanted to know what employment developers without a presence in the MGA thought of the area as well. Through their findings from the interviews, there is consensus that the Mesa Gateway Area is a future economic growth area for the South East Valley. The question is….how long will it take for development to occur and what are the challenges?
The findings from the interviews are summarized in the tables at the end of this section. They are broken into perspectives from the office and industrial developers. Each table provides a list of positive attributes and a list of challenges that developer foresee over the next 25 years.
6.1 Summary of Perceptions
Developers believe it is premature for speculative employment developments in the Mesa Gateway Area due to the following:
1. Lack of existing residential density in the immediate area. The labor force and buying power on the outskirts of the MGA already have available options for office and retail opportunities.
2. There is no proven demand for office space and the MGA has not landed any significant office space users.
3. Lack of basic infrastructure (roads, utilities, water etc.) to development sites. Where will the infrastructure come from and how will it get paid for?
4. Current supply of office and mixed-use projects planned or under construction along the SanTan Freeway (creating competition to attract office employers). There is about 1.8M square feet of Class “A” office space alone scheduled to be completed in 2007 and 2008.
5. Current land pricing does not match up with the time it will take to wait for the area to mature. With land pricing already inflated in the MGA, developers are not able to purchase properties at today’s price, pay to bring in necessary infrastructure, carry the property for 3 to 5 years and then build. In other words, the price that land owners are looking for today will probably not make sense to spec developers for another 3 to 5 years.
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Developers who do not have a presence in the area find it very appealing due to the Airport, ASU Polytechnic Campus, Levine/ DMB’s projects, as well as the completed Loop 202 freeway. All are a recipe for strong economic growth. Developers feel the City needs to help in defining the area and attracting business other than industrial and aviation users. They feel that there also needs to be an increase the amount of residential density in the area for the jobs that will be created as well as providing support for the ASU Polytechnic Campus. By aligning the area with the Polytechnic campus, the area could define the types businesses that locate in the area.
Most developers who are already in the area have owned their land for the 18 months or longer. Some have done site plans and are currently submitting the plans to the city. They feel the MGA will be a great economic engine for the area but this needs to be closely managed with planning. Some of the concerns that were raised revolve around infrastructure costs and the planning of the area. Roads and amenities such as sewer, water, power, need to be put in and allow for easy access to their sites. The City of Mesa as well as the airport authority needs to cooperate with the developers in helping them through the entitlement phase as this could slow down the development. Funding sources for these roads and amenities needs to be identified and not put solely on the backs of the developers/landowners.
Developers are starting to see an increase in activity in the MGA but it is still in the beginning stages. Most feel that industrial developments should be to the south of the airport and that more land should be dedicated to residential.
The consensus from the employment development community was that the MGA has great future potential but is not currently able to attract any significant spec development from office, additional retail, mixed-use or large industrial developers today. While these developers thought there may be some immediate room for a few smaller industrial developments, they felt that any spec office, retail and mixed-use projects were at least 3 to 5 years away.
In the Phoenix MSA, the typical order of development has been:
1) Residential 2) Retail 3) Employment 4) Mixed-Use
In order to go in the reverse direction of this typical development order, MGA and the City of Mesa will have to do a tremendous job of attracting employment users that want office space very close to the MGA for some specific reason. Even if these economic development departments do a great job in garnering interest from prospective employers, those employers would have to be willing to wait for a new office building to be constructed (since no developers are willing to build spec out there at this time).
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The Mesa Gateway Area has very limited quality, high density residential development in the immediate area due to the amount of land that is designate for employment (mainly because of the flight paths). However, the fact remains that experienced developers of quality office and mixed-use projects contend that there is not enough immediate labor force to draw from in order to create a new submarket. Additionally, there are two million square feet of office projects coming on line in the next 18 months just west along the San Tan Freeway. The Gilbert regional mall and related commercial development is significant competition for the foreseeable future.
On a positive note, the developers interviewed think that the MGA has phenomenal potential over the next 5 to 50 years. The main reasons they believe in its potential are as follows:
1. Recent completion of the SanTan Freeway. The freeway will provide excellent access to the airport & surrounding commercial developments in order to attract employees, customers & consumers in the SE Valley and overall metro area.
2. The Phoenix-Mesa Gateway Airport - Positioned to be the reliever airport for Sky Harbor’s cargo, the airport will create jobs and the need for industrial development related to cargo operations in the near future. - Should attract regional businesses who want to be close to an airport in order to easily connect to their other regional operations. - Length and number of runways position the airport to accommodate passenger flights and commercial travel down the road as an alternative to a congested Sky Harbor.
3. Educational institutions located at MGA - ASU Polytechnic is growing very quickly and building more programs and facilities. Expected to have 68,000 students at final capacity. - Chandler-Gilbert Community College (East) is also growing quickly and is expected to have 10,000 students at final capacity.
4. Continued residential growth in the Southeast Valley - Tremendous growth over the past five years. - DMB & Levine plan to add 12,000 to 14,000 residential units on the Proving Grounds. - Superstition Vistas will eventually house up to 900,000 residents at full build- out.
6.2 Development Timing
With a two mile radius extending out from the center of the airport there is roughly +/- 10,000 acres of land available and currently designated for employment uses. To put this into perspective, the +/-10,000 acres of employment land surrounding Sky Harbor
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Airport has taken about 50 years to develop and there are still some available land sites for development. Sky Harbor is at the center of the Valley and at the hub of the Valley’s freeway system.
While Phoenix-Mesa Gateway Airport does not have a central location right now, it will indeed be central to a lot of residents once Pinal County and Superstition Vistas are more developed. Additionally, the Phoenix Metro Area has been adding new residents much more quickly in recent years versus when Sky Harbor was originally built. All of this being said, most developers still feel that it will take 30 to 40 years to fully develop the MGA and to realize its full potential.
Following are summary charts of developer/landowner opinions.
Table 6-1 Office Developers Time Positive Attributes Challenges Frame Next Great publicity of the area and tales of Traditional employment development requires Five what the future holds (buying into the more residential density in the immediate area Years story) to attract large employers Phoenix-Mesa Gateway Airport No proven office space demand at this time. Growth West of Higley along the San Tan Freeway • Commercial there is about 2 million square feet of office product planned for the next 18 months • Private (potentially a lot of competition for employers looking in the area). • Cargo Basic infrastructure is deficient at most development sites. The City of Mesa also San Tan Freeway & Loop 202 needs to think of future technology Completion requirements employers will need such as fiber Surface street improvements of major in the streets. arterials Current high land prices have made carry costs ASU Polytechnic is training a skilled too expensive for speculative developers, labor force causing a “wait and see” attitude. • New facilities Dense employment is usually the last to be developed (after residential & service retail). • Expanded curriculum Economic Development of the area needs help from City of Mesa and Phoenix-Mesa Gateway DMB & Levine will unveil their Airport to attract office space employers. master plans and be processing their Reaching consensus on the appropriate land developments plan for the area that will allow for long-term smart development/growth Educating employment developers on details of the area
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6 to 15 DMB/Levine master plans well under Need to make sure cutting edge technology is Years way in place for businesses (fiber, wireless, ???) • Estimated to add 12,000 to Employment needs density housing to support 14,000 housing units & it. commercial development Critical balance between aircraft flight, residences & employment users needs to be Continued growth of MGA followed ASU Polytechnic continues to grow Need to make sure the area is thought of by and train a skilled labor force office & mixed uses (not just perceived as an Basic infrastructure & major arterials industrial airport/area). will be in place Bring the light rail or other commuter rail Expanded freeway system partially service to the area constructed & headed toward Pinal County (802 Loop) Office users have been proven to the area?? 16 to 25 Superstition Vistas Employment expansion needs increase in Years • Estimated to add up to 900,000 residential density to support it. housing units at final build out Economic development needs to be a continuing integral part of defining the area as ASU Polytechnic reaches 68,000 it evolves. students, offering a huge base of Make sure not to lose momentum skilled labor Redevelopment of under utilized properties Expanded Freeway system in place east of Maricopa County into Pinal County (802 Loop) Mesa Gateway Area becomes what it is meant to be Light rail or some type of commuter rail will be in place
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Table 6-2 Industrial Developers Time Positive Attributes Challenges Frame Next Cessna, Boeing & Embrair No proven demand for large distribution at this time. Five are building major facilities The Union Pacific Railroad is overburdened and does Years and adding jobs not have capacity for new accounts. Rail does not really Pretty good current demand add value in this area. Rail service will always be more from other industrial users in expensive than truck when located this close to a port the areas surrounding the (except for commodities like Lumber, oil, concrete, airport etc.) Great publicity of the area Basic infrastructure is deficient at most development and tales of what the future sites. The City of Mesa also needs to think of future holds (buying into the story) technology requirements employers will need such as Phoenix-Mesa Gateway fiber in the streets. Airport Growth Current high land prices have made carry costs too • Commercial expensive for most large-scale speculative developers, causing a “wait and see” attitude. • Private Securing cargo users at the airport Securing local distributers • Cargo There is so much land slated for industrial that developers are worried about unlimited competition San Tan Freeway & Loop 202 Completion Surface street improvements of major arterials ASU Polytechnic is training a skilled labor force • New facilities
• Expanded curriculum
DMB & Levine will unveil their master plans and be processing their developments 6 to 15 DMB/Levine master plans Employment needs density housing to support it. Years well under way Critical balance between aircraft flight, residences & • Estimated to add employment users needs to be followed 12,000 to 14,000 housing units & commercial development
Continued growth of MGA
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ASU Polytechnic continues to grow and train a skilled labor force Basic infrastructure & major arterials will be in place Expanded freeway system partially constructed & headed toward Pinal County (802 Loop) 16 to Superstition Vistas Critical balance between aircraft flight, residences & 25 • Estimated to add up employment users needs to be followed Years to 900,000 housing Employment expansion needs increase in residential units at final build out density to support it. Economic development needs to be a continuing ASU Polytechnic reaches integral part of defining the area as it evolves. 68,000 students, offering a Make sure not to lose momentum huge base of skilled labor Redevelopment of under utilized properties Expanded Freeway system in place east of Maricopa County into Pinal County (802 Loop) Mesa Gateway Area becomes what it is meant to be Light rail or some type of commuter rail will be in place
6.3 Major Landowners in MGA
For reference purposes, the following map and related chart show the location and size of the major landholdings in the MGA. Many of these landowners were interviewed for this study. Displayed below the map are the corresponding numbers with information on the property consisting of each parcel’s size and owner/stakeholder.
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Map 6-1
Table 6-3 Major Stakeholders Phoenix-Mesa Gateway Airport Land Use Study Area
No. Size(Acres) Owner/Stakeholder No. Size(Acres) Owner/Stakeholder 1 202 Birtcher-Lundsford/Morrison JV 21 80 Paragon Properties 2 364 Arizona Dairy Company 22 1,780 Pacific Proving (Levine) 3 57 Roy Massey 23 47 Maricopa Community College 4 80 Sun Pacific Investments 24 ASU East 5 202 Orsett 25 52 Reliance Companies 6 149 First Industrial 26 138 Gila River Indian Community 7 79 Robert B & Margo Michelle Chilcott Family Tr 27 38 First Industrial 8 166 NKS Group 28 154 Double D Realty Inc. 9 60 Billy & Nora Maynard 29 2,941 Williams Gateway Authority 10 88 Van Rijn Dairy (Jody) 30 927 Paragon Properties 11 129 DeRito Partners 31 76 TUCKER PROPERTIES LTD 12 270 First Industrial 32 172 DeMuro Properties 13 229 Whane of Mesa LP 33 99 VIEWPOINT RESORT LC 14 74 Warren & Lela Steffey Tr 34 76 Paragon Properties 15 3,113 DMB 35 92 Double D Realty Inc. 16 216 Garvin Holdings, LLC 36 72 Double D Realty Inc. 17 229 Kitchell 37 115 Vanderbilt Farms 18 113 Marwest Enterprises, LLC 38 157 Harris Cattle Company 19 117 Jim Boyle 39 385 TRW 20 Gila River Indian Community 40 215 Commercial Metals Co.
Source: Lee & Associates 104 Task 2d: Current Trends Economic Base Memorandum
7.0 Analysis of Reliever Airports
Large metropolitan areas of the U.S. were examined to provide additional perspective into how many reliever airports are being utilized in those particular areas, how those airports function in the local economy and the development potential of the airports in the future. The second part of this section focuses on two California airports and the development that has occurred around them.
7.1 Overview of Reliever Airports
The maps included in this section display the metropolitan areas of Chicago, Los Angeles, San Francisco, and Houston, along with any major airports in the communities. In this case, a major airport is defined as one that provides regular flights aboard a major airline carrier. The cities of Atlanta, Seattle, and Denver were also examined. However, these cities have only a single major airport with multiple carriers, similar to Phoenix. Love Field in the Dallas-Ft. Worth area is occupied primarily by Southwest Airlines.
Summary data for each of the reviewed airports is displayed in Table 1. In the cases of Chicago, Dallas, and Houston, the smaller airport is the older airport. In these examples, growth constraints led to additional airport facilities to be developed. The largest airport reviewed in this report, Atlanta Hartsfield, is the only major airport in that community.
There does not appear to be any consistency related to when an area’s second airport opened in relation to population count. For example, the Chicago area had a population of over five million when O’Hare opened. On the other hand, the Dallas area only had a population of 1.6 million when Dallas-Fort Worth opened, and Houston only had a population of 1.9 million when George Bush opened. A more complete discussion of the major communities listed in Table 1 follows on subsequent pages.
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Table 7-1
Airport Statistics and Metro Area Population
MSA PopulationPop w/in Ten Miles Number of Passengers Runways Comparable MSA Airports Year Opened At Opening 2000 2000 2005 2006 Chicago 9,157,540 Midway 1927 1 4,511,523 2,554,909 17,863,000 18,868,000 5 O'Hare 1947 2 5,249,981 1,818,061 76,581,000 76,282,000 8
Dallas 5,221,801 DFW 1974 3 1,630,739 720,883 59,162,000 60,226,000 7 Love 1928 4 586,791 1,198,673 5,897,000 6,875,000 3
Houston 4,669,571 George Bush IAH 1969 5 1,903,191 533,936 39,715,000 42,549,000 5 Hobby 1937 1 627,311 873,778 8,257,000 8,549,000 4
Los Angeles 16,373,645 LAX 1927 1 2,208,492 9,519,338 2,302,009 61,490,000 61,041,000 5 Ontario 1923 1 936,455 3,254,821 870,751 7,214,000 7,050,000 2 John Wayne 1923 1 936,455 2,846,289 1,409,060 9,627,000 9,614,000 2 Burbank 1930 2 2,208,492 9,519,338 1,962,873 5,513,000 5,689,000 2 Long Beach 1923 1 936,455 9,519,338 2,035,254 3,034,000 2,758,000 3
San Francisco 7,039,362 San Francisco 1927 1 753,447 849,604 33,207,000 33,565,000 3 San Jose 1949 2 290,547 1,379,870 10,757,000 10,708,000 3 Oakland 1927 2 553,491 876,383 14,418,000 14,434,000 4
Atlanta Hartsfield 1925 1 715,391 4,112,198 - 85,907,000 84,847,000 4 Seattle-Tacoma 1944 6 599,832 3,554,760 - 29,289,000 29,979,000 2 Denver International 1995 7 2,109,282 2,581,506 - 43,388,000 47,325,000 6 Phoenix Sky Harbor 1935 1 215,034 3,251,876 1,065,626 41,215,000 41,437,000 3
*As measured by decennial census Reason for original airport opening: 1 Developed from airfield. 2 Expand commercial transportation. 3 Coordination between neighboring cities. 4 Lack of coordination between neighboring cities. 5 Limited capabilities of alternate airport. 6 Military support in response to WWII. 7 Replaced Stapleton Airport.
Sources: US Census, Claritas, Elliott D. Pollack & Company, www.officialusa.com, airport websites, airport officials
Chicago The majority of the passenger traffic (80%) in Chicago goes through O’Hare, with over 76 million passengers in 2006. The second largest airport, Midway, is much smaller with just under 19 million passengers in 2006. This compares to 41.4 million passengers at Sky Harbor in 2006. Midway is also the older of the two major Chicago airports.
O’Hare and Midway airports are approximately 16 miles apart (farther if traveling by automobile). While this information serves as an example of distance between a major airport and a reliever airport in one of the country’s most populated cities, it is difficult to compare Chicago with Phoenix due to the significant difference in population.
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It is also difficult to compare Sky Harbor with the Chicago airports since the Chicago area serves as a major connecting airport for many travelers, and the published passenger counts do not directly reflect local demand for airport operations. Many travelers that are included in the traffic counts never exit the airport except by plane to another destination. This is also the case with Sky Harbor, albeit to a lesser extent.
Map 7-1
Map 1: Major Airports Chicago Metropolitan Area
O’Hare
Midway
Los Angeles The Los Angeles metropolitan area, as of 2000, included 16.4 million persons and five major airports. The major airports include Los Angeles International (LAX), John Wayne, Long Beach, Burbank (Bob Hope), and Ontario. Los Angeles International is by far the busiest of these five airports with over 61 million passengers in 2006, compared to only 9.6 million for John Wayne, the second busiest.
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Approximately 18 miles separates each of the three coastal airports and LAX. Ontario is much farther inland, and may not accurately represent an appropriate distance between reliever airports in a large metro area.
Similar to the Chicago example, it may not be completely representative to compare the Los Angeles air transportation market with that of Phoenix. The Los Angeles market is much larger than the Phoenix market. Los Angeles International also serves as Southern California’s largest cargo destination (5th busiest cargo airport in the world1). For comparison, LAX handled 2.1 million tons of air cargo in 2006, compared with only 316,000 tons for Sky Harbor.2
However, the Los Angeles area may be comparable to Phoenix in that the population is dispersed over a wide area, and in this example there clearly exists need for reliever airports. Even though the smaller airports in the Southern California area are considered reliever airports in this report, there is a large population near each.
Map 7-2 Map 2: Major Airports Los Angeles Metropolitan Area
LAX Burbank John Wayne Ontario Long Beach
1 http://www.lawa.org/lax/laxframe.html 2 City of Phoenix
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San Francisco Airports around San Francisco were also examined. Because of development constraints due to the proximity to the ocean and Bay, development patterns in San Francisco, Oakland, and San Jose are unique to that particular area. The San Francisco airport is about 30 miles northwest of the San Jose airport, and the Oakland airport is across the Bay.
Each of the major cities reviewed in this report have unique attributes, and caution must be used in comparing the cities to Greater Phoenix. However, as was the case with Chicago and Los Angeles, the San Francisco example does display that large metropolitan areas do utilize in many circumstances multiple airports, with one serving as the primary hub (San Francisco accommodated almost 34 million passengers in 2006), and others serving as relievers (14.4 million passengers in the Oakland airport; 10.7 million passengers in the San Jose airport).
Map 7-3
Map 3: Major Airports San Francisco Bay Area
San Francisco Oakland San Jose
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Houston The Houston metropolitan area may provide the clearest example of how a large city utilizes a reliever airport. Houston has two major airports: George Bush Intercontinental Airport-Houston and William P. Hobby Airport. George Bush served almost 43 million passengers in 2006, while Hobby serviced just over 8.5 million. Hobby may be considered a large reliever airport in this area. Hobby is the older of the two Houston airports, opening in 1937. George Bush opened in 1969, reportedly due to the expansion limitations of Hobby.
Downtown Houston is at the center of this large metropolitan area. The metro area radiates outward from this center fairly evenly, although the southeast portion of the city is bounded by the Gulf of Mexico. Approximately 26 miles separates George Bush from Hobby. The more rural location of George Bush has allowed it to expand more easily.
Map 7-4
Map 4: Major Airports Houston Metropolitan Area
George Bush IAH
William P. Hobby
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Other Airports Other large metro areas were also examined. Included in this review are Atlanta, Dallas- Fort Worth, Seattle, and Denver.
The Atlanta area had a population of 4.1 million people as of 2000. In 2006, almost 85 million passengers traveled through Atlanta’s Hartsfield-Jackson. Despite the fact that Atlanta’s airport has become one of the busiest in the world, no large reliever airports exist within the metropolitan area. It is not unreasonable to assume that Sky Harbor could similarly remain as Greater Phoenix’s primary airport until it reaches full capacity in about 2025.
Dallas has the larger Dallas-Fort Worth airport and Love Field (which primarily serves as a limited reliever for Southwest Airlines). A reliever airport with only a single large carrier or multiple commuter type airline operations may be a realistic possibility for Phoenix-Mesa Gateway in the near future. Seattle-Tacoma, and Denver International also serve as their communities’ primary major airports.
Summary of Reviewed Airports The average distance between the airports in each of the reviewed metro areas is 21 miles. Coincidentally, the distance between Sky Harbor and Phoenix-Mesa Gateway is about 21 miles. In addition to distance between airports, population data was reviewed to determine if there was any relationship between community size (population) and airport activity (passenger counts).There does not appear to be such a relationship. Using the data from Table 1, the passenger count to population ratio in the Los Angeles area is only 4.69, while the ratio in Atlanta is 18.69.
The nature of the specific airport influences the ratios. For example, Atlanta serves as a hub for many airlines and is the primary air transportation hub of the Southeast United States. This increases the passenger count at the airport and positively influences the passenger count to population ratio. For comparison, the average passenger count to population ratio for the reviewed communities is just over 10. Sky Harbor does not appear to have a disproportionate passenger traffic volume when considering the size of the metro Phoenix area, with the passenger to population ratio of just under 11.3
7.2 Reliever Airport Models
Research was conducted on two airports in the Southern California area that may be models for development of Mesa Gateway Area. These two airports are: • John Wayne International Airport and • Ontario International Airport.
3 While the population data is interesting to review, the most important factor appears to be the capacity of original airport (i.e. ability to grow with the community).
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John Wayne International Airport John Wayne International Airport is located in the City of Costa Mesa just north of Newport Beach in Orange County. It is next to the City of Irvine and is known as one of the premier reliever airports in the country, primarily due to the commercial development that has developed around the airport. The following aerial photos show the location of the airport with the primary commercial area outlined for reference purposes. The character of the development around the airport is primarily a mixture of light industrial and garden and mid-rise office uses. The area has been developed to high standards in terms of architecture and landscaping, particularly on the eastside of the airport where most of the office buildings are located.
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Map 7-5 John Wayne International Airport and Surrounding Commerce
Primary Commercial Area
Airport
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Map 7-6 Close up of Airport Area
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The types of business establishments located around John Wayne are noted on the following table for 2005. In total, there are approximately 8,400 businesses employing nearly 183,000 people. The industry categories with the highest employment levels include finance and insurance, professional, scientific and technical services, and administration and support. Manufacturing is also an important component near the airport representing approximately 4% of all establishments but 9.3% of total employment.
Table 7-2
Commercial Business Establishments John Wayne Airport Market Area 2005
Establishments Estimated Employment Industry Total % of Total Total % of Total Construction 357 4.3% 8,172 4.5% Manufacturing 338 4.0% 16,994 9.3% Wholesale trade 619 7.4% 12,668 6.9% Retail Trade 503 6.0% 7,666 4.2% Transportation & Warehousing 106 1.3% 2,654 1.5% Information 274 3.3% 6,540 3.6% Finance & Insurance 1,193 14.2% 29,638 16.2% Real Estate & Rental & Leasing 808 9.6% 12,135 6.6% Professional, Scientific & Technical Services 2,284 27.3% 29,341 16.1% Management of Companies & Enterprises 103 1.2% 7,607 4.2% Admin, Support, Waste Mgt, Remediation Services 520 6.2% 21,381 11.7% Educational Services 104 1.2% 3,402 1.9% Health Care and Social Assistance 669 8.0% 7,525 4.1% Arts, Entertainment & Recreation 81 1.0% 2,735 1.5% Accommodation & Food Services 418 5.0% 14,155 7.8% Grand Total 8,377 100.0% 182,609 100.0%
Source: US Bureau of Census, USPS, Elliott D. Pollack & Co.
To give some perspective to the size of the commercial development surrounding John Wayne International Airport, the primary commercial area outlined on the aerial photo measures approximately five miles in length in a northeasterly direction and two miles wide or a total of ten square miles. Therefore, five John Wayne International Airports plus adjacent commercial areas could fit within the Mesa Gateway Study Area.
Ontario International Airport Ontario International Airport is located near the confluence of two major interstate freeways, Interstate 10 (one of the major transcontinental freeways) and Interstate 15 (which connects the Los Angeles area to Las Vegas). The airport is located within the City of Ontario and is a member of the Los Angeles World Airport (LAWA) System comprised of four airports owned and operated by the City of Los Angeles. Those
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The Ontario Airport is approximately 35 miles east of Downtown Los Angeles and is located in one of the fastest growing transportation regions in the United States. Besides the freeway system near the airport, there is also extensive rail service as well. For this reason, the character of development around Ontario International Airport is decidedly different from John Wayne. The following aerial photographs show the character of the developments surrounding Ontario, much of it comprised of large warehouses, some of which have rail service.
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Map 7-7 Ontario International Airport and Surrounding Commerce
Primary Commercial Area
Airport
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Map 7-8 Close up of Airport Area
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The character of development surrounding Ontario International Airport is noted on the following table. The heaviest concentration of businesses is in manufacturing, wholesale trade, transportation and warehousing and administration and support. There are slightly less than 3,600 establishments employing 117,000 people around the airport.
Table 7-3 Commercial Business Establishments Ontario International Airport Market Area 2005
Establishments Estimated Employment Industry Total % of Total Total % of Total Construction 292 8.2% 6,513 5.6% Manufacturing 515 14.5% 22,667 19.4% Wholesale trade 579 16.3% 17,868 15.3% Retail Trade 505 14.2% 11,557 9.9% Transportation & Warehousing 434 12.2% 23,708 20.2% Information 55 1.5% 2,309 2.0% Finance & Insurance 168 4.7% 3,312 2.8% Real Estate & Rental & Leasing 172 4.8% 2,098 1.8% Professional, Scientific & Technical Services 188 5.3% 2,137 1.8% Management of Companies & Enterprises 39 1.1% 1,556 1.3% Admin, Support, Waste Mgt, Remediation Services 194 5.4% 13,042 11.1% Educational Services 15 0.4% 379 0.3% Health Care and Social Assistance 137 3.8% 2,273 1.9% Arts, Entertainment & Recreation 26 0.7% 650 0.6% Accommodation & Food Services 241 6.8% 7,072 6.0% Total 3,560 100.0% 117,137 100.0%
Source: US Bureau of Census, USPS, Elliott D. Pollack & Co.
To give some scale to the size of the business area surrounding the airport, the area enclosed within the dash line on the aerial photo measures approximately seven miles in an east-west direction and seven miles in a north-south direction as well. This area is not a perfect square or circle, but likely encompasses thirty-five square miles. There is also an older industrial area just east of the outlined area that is comprised of businesses with outdoor storage, trucking, scrap yards and similar uses. This area is primarily within the flight path and approach to the airport.
7.3 Summary
The above research demonstrates that Ontario and John Wayne Airports have developed in very different manners given the historic context and the character of the assets surrounding the airport. John Wayne is located in the affluent Orange County area near beach communities and has established itself as a premier business location for regional and national headquarters, architectural and engineering firms and finance corporations. Task 2d: Current Trends Economic Base Memorandum
The airport also serves the tourist destinations and beach communities such as Newport Beach and Laguna Beach.
By comparison, Ontario International Airport is located within an area of manufacturing, warehousing, and transportation and distribution companies by virtue of its location at the intersection of two major freeways combined with transcontinental rail service. At least a portion of this traditional industrial development was in place prior to the Ontario Airport expanding to its current service level today. However, the presence of the airport has obviously been a catalyst for further development of the area over the past twenty years.
The Mesa Gateway Area possesses the assets to respond to several different real estate markets including a combination of that found at both the Ontario and John Wayne Airports. The examples of these two airports will help to further define the role the Mesa Gateway Area will assume in the Southeast Valley.
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8.0 Summary and Conclusions
8.1 General Conclusions
The information contained in this review points to a very favorable long term outlook for the area surrounding Phoenix-Mesa Gateway Airport. This conclusion is validated by statistical analysis as well as opinions of real estate developers, some of whom do not yet have a presence in the area. The Greater Phoenix area is poised to lead the nation during the next several decades in terms of population growth, employment growth, and personal income growth. The Mesa Gateway Area is strategically located within this growth boundary and posts many valued economic attributes that lead to this favorable conclusion. Highway access is currently excellent and will only improve with future freeway expansion into Pinal County. Access to skilled labor will also improve as the Southeast Valley further develops. In fact, the airport area will ultimately be the employment hub of the Southeast Valley.
However, the extent of development success will vary considerably from decade to decade. Through 2010, competition from other parts of the Metro Phoenix area will limit expansion potential. This will be exacerbated by the fact that additional population growth in the Southeast Valley must occur to achieve a truly superior employment and population base. During this period, planners can expect the business locations to be dominated by industrial operations.
During the next decade, the Mesa Gateway Area will surpass most other parts of the Metro Phoenix area in terms of location attributes. If the proposed south region freeway indeed connects to I-10, the value will increase even further. During the 2020 to 2030 decade, assuming proper planning, the airport area should be gin to see a shift in development activity from industrial to office uses.
During all phases of development, planners and economic developers can pursue businesses in many types of industries. The old model was for aerospace companies to locate near secondary and reliever airports. However, global competition has resulted in the need for companies in many other industries to further utilize air transportation to deliver goods in a timely manner and to reduce inventory holding costs through just in time procedures. This new model means that regional planners can look beyond the typical set of industries and seek out companies that have the best opportunity to bring dollars into the region, create additional spin off operations, and create higher wage jobs.
In order to mitigate the development risks during the first years of development, it may be necessary to provide incentives for business locations. Low to no cost programs should first be pursued. These could include some form of tax or development fee abatement or reduction. These could also include some cleverly constructed incentive packages that only benefit the locating business if the company remains at the site for an extended period of time. Ultimately, a well considered development plan will aid in creating a favorable branding of the airport region, thus resulting in benefits beyond the listing of specific site location factors.
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8.2 The Concept of the Aerotropolis
One stakeholder entity has introduced the term “aerotropolis” into the discussion of the future of growth of MGA. While not well-known, the term has been used in academic circles for more than a decade. It is based on the premise that airports are essential for businesses’ ability to compete in the global market given the heightened role of logistics and distribution in meeting customer expectations. In fact, airports in the 21st century are being compared to the impact of cars and trucks on urban development in the 20th century and railroads in the 19th century. Some examples of the importance of airports in the U.S. are the emergence of Memphis and Louisville due to Federal Express and UPS operations. E-commerce businesses have established facilities to take advantage of available air transportation. The concept of aerotropolis takes this phenomenon one step further into an aviation-linked urban form.
Supply-chain linked businesses involving just-in-time and custom manufacturing have become a major competitive advantage for manufacturers. Speed and agility to meet market demands are important for productivity and pricing. Access to an airport facility can be an important advantage although many experts agree that companies can achieve the same results if located even ten or twenty miles from the airport.
Several airports around the country are developing the concept of the aerotropolis including Dallas-Fort Worth, Denver and Detroit. Even Ontario is cited in academic papers as an existing aerotropolis. It is a concept that should be explored for the Mesa Gateway Area.
8.3 Alternate Growth Scenarios
In order to estimate the future potential growth of MGA, two growth scenarios were developed from the MAG projections. These scenarios assumed that the Southeast Valley of Metro Phoenix would capture a larger share of industrial and office employment than indicated in the initial forecast and that Mesa would capture a growing share of the Southeast Valley job market. The scenarios have been developed from the following findings of this report:
1. The Mesa Gateway Area has significant competitive advantages to capture a disproportionate share of Maricopa County’s employment growth as measured against the assets of other cities.
In the long-term future, MGA will be viewed as an infill area as residential growth continues into Pinal County and the Superstition Vistas area. This employment reserve, with excellent freeway access, will serve as a long- term supply of land that will provide an employment base for Pinal County residents. These locational assets, in addition to the Airport and educational facilities, have not been recognized in the MAG forecast. As a result, MAG has underestimated the long term potential of MGA to
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attract employers and shift employment growth from other areas of Maricopa and Pinal Counties.
2. Transportation, or lack of it, will continue to be a long term impediment for the growth of Pinal County. This will impact the extent that new residents enter the region surrounding MGA and, thus, the extent that regional labor force supply will improve over time. This will have a direct impact on the development of the Phoenix-Mesa Gateway Airport. There are no precise plans for construction of major roadways in Pinal County and little funding is available. Existing and planned freeways in and around MGA will be a strong catalyst for continued employment growth and provide MGA a significant competitive advantage.
Given these findings, the following scenarios were developed for the MGA. Instead of a declining capture rate of industrial and office employment through 2030 as projected by MAG, the scenarios forecast a growing share as shown on the following chart. These scenarios were developed to show the potential impact of an increasing employment capture rate for the Southeast Valley and Mesa compared to MAG’s adopted forecast. They are not intended to illustrate an actual forecast, but rather what-if scenarios.
Scenario 1 grows the share of industrial and office employment in the Southeast Valley to 40% by 2030; Scenario 2 grows that share to 45%. Though not shown on the chart, Mesa’s share of the Southeast Valley employment market is increased to over 50% by 2030.
Table 8-1 Summary of Scenario Assumptions
Scenario 1 Scenario 2 Office and Industrial Office and Industrial Employment Employment Capture Rates Capture Rates Time Period SE Valley % Mesa % SE Valley % Mesa % 2005-2010 35.3% 29.9% 35.3% 29.9% 2010-2020 37.0% 38.0% 40.0% 44.0% 2020-2030 40.0% 50.0% 45.0% 56.0%
Sources: MAG 2007, Elliott D. Pollack & Co.
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Chart 8-1
Alternate Employment Growth Scenarios Projected Southeast Valley Capture of Maricopa County Office & Industrial Employment Growth 2005 - 2030 Sources: MAG 2007, Elliott D. Pollack & Co.
50.0%
45.0% 45.0% Scenario 2
40.0% 40.0% 40.0% 37.0% 35.3% Scenario 1 35.0% 34.6%
30.0%
MAG Projection 25.0%
23.8% 20.0%
15.0%
10.0% 2005-2010 2010-2020 2020-2030
Baseline Case Scenario 1 Scenario 2
The following chart shows the resulting jobs to population ratio for Mesa based on the assumptions outlined above. Through 2010, MAG’s forecast appears reasonable. Between 2010 and 2020, the jobs to population ratios for the two scenarios begin to increase above MAG estimates. Between 2020 and 2030, MGA makes some larger employment increases as it begins to capture a larger share of the market. As a result, the jobs to population ratio for Mesa would increase to 0.60 in the most aggressive scenario.
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Chart 8-2
Projected Jobs To Population Ratio City of Mesa Sources: MAG 2007, Elliott D. Pollack & Co.
0.70
0.60 0.60 0.58
0.53 0.52 0.49 0.50 0.50
0.43 0.43 0.43
0.40 0.36 0.36 0.36
0.30
0.20
0.10
- MAG Scenario 1 Scenario 2
2005 2010 2020 2030
Overall, the above scenarios would produce additional jobs for Mesa in the range of 31,000 to 54,000. Table 8-2
Alternate Employment Growth Scenarios Mesa Gateway Area
Forecast 2005 2010 2020 2030 Total MAG 174,909 218,085 275,236 306,030 Scenario 1 174,909 218,085 280,879 331,783 Scenario 2 174,909 218,085 290,104 345,492
Job Increase Over MAG projections Scenario 1 - - 5,643 25,753 31,395 Scenario 2 - - 14,868 39,462 54,330
Sources: MAG 2007, Elliott D. Pollack & Co.
Based on typical floor area ratios, if all the jobs cited in the scenarios occurred within MGA, the additional land demand in MGA would increase between 860 and 1,488 acres. So even with some aggressive estimates of employment growth and capture rates for Mesa, there would still be a large supply of employment land available for future development in the Mesa Gateway Area. Based on the calculation below, that excess inventory totals more than 11,000 acres of employment and office land.
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Table 8-3
Estimated 2030 Employment Land Demand (Acres) Vs. Mesa General Land Use Acreage Mesa Gateway Area
Scenario 2 MAG Additional Land Total Land Current Job Type Forecast Demand Demand Land Use Plan Surplus/(Deficit) Retail 631 - 631 774 143 Office 418 857 1,274 254 (1,021) Industrial* 713 631 1,345 13,324 11,979 Total 1,762 1,488 3,251 14,352 11,101
*Industrial includes Mixed-Use Employment, Business Park, Light Industrial, General Industrial categories.
Sources: MAG 2007, City of Mesa
8.4 Additional Conclusions
In addition to the above general findings described above, a number of other conclusions were reached throughout the text. Following are those conclusions.
• Rail service in the MGA is not, today, a viable course of action due to the requirements of UP and the limited interaction between rail and air freight. In addition, the MGA is at a competitive disadvantage to the historic distribution and warehouse region of southwest Phoenix. While the option for rail service in the future will likely exist, its pursuit also needs to take into account the moderate pay levels for warehouse workers and the desire of the City to see a more intensive, upscale urban center around the Airport. The John Wayne Airport model seems more appropriate for MGA.
• As noted in the prior section, even increasing the projected capture rates for MGA to relatively high levels, the amount of employment land that will be absorbed over the long term is modest relative to the land supply. The development of MGA is a long term proposition and requires a long term outlook and vision.
• With respect to the above finding, the City needs to recognize that the development of MGA will change over the long term. Buildings that are constructed today and in the near term may be replaced in 20 years with more intensive uses. The City should encourage compatible uses today in order to jump start development, recognizing that change will occur in the future. Methods to assist in infrastructure development must occur today so as not to burden the pioneer developers who are willing to absorb the risk of developing in a new market.
• While residential development is now on the doorstep of MGA, there still needs to be further growth of the residential market and available labor force before extensive employment-related development occurs.
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The Superstition Vistas area holds the key to providing this labor force in the long term.
• The branding of the Mesa Gateway Area with a strong vision and plan is important for its future success. MGA needs to be recognized with the Alliance, John Wayne, and Ontario Airports as a burgeoning business location, recognizing its assets and future growth potential. With this branding, MGA will be able to compete more effectively in the local marketplace against other employment centers.
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