Phoenix Makes The Case For Space In A Post-Coronavirus Market

With social distancing recommendations being implemented with no end in sight, physical space is at a premium now more than ever. That trend has been buoying some commercial real estate in Phoenix.

The northeast corridor of the valley, which consists of northeast Scottsdale and the Salt River Pima-Maricopa Indian Community, offers large, customizable floor plans and may soon see a spike in its already high demand.

“Phoenix is a large market but there are not a lot of options available to customize a large building, especially right off a major highway like the Loop 101,” Cushman & Wakefield Managing Director Greg Mayer said. “You get access to both the employee and executive labor bases that exist right off the Loop 101 at the Chandler, Mesa, Scottsdale and Tempe markets.”

Access to the four largest cities off one highway is what separates the Loop 101 from the other east valley freeways, Highway 60, which goes through Mesa and Tempe and the Loop 202 that goes through Chandler, Mesa and Tempe.

Several Fortune 500 companies have staked their claims in the northeast valley on the Loop 101 and have regional offices there. Current tenants include McKesson, First American Title Co. and a subsidiary of Allstate.

“These three moving in over the last three years have really solidified the location as a true Fortune 500 office location,” Mayer said.

The majority of this land falls on the sacred land of the Salt River Pima-Maricopa Indian Community. This means different leasing and permitting processes compared to Scottsdale, because all tenants must lease land, typically from individual families that own segments of the land on the Indian community.

“It is up to the families that own it to develop the land or not develop the land,” Mayer said. “The one thing you learn quickly is that [the Salt River Pima-Maricopa Indian Community] have a lot more respect for the land each family owns than our particular view from strictly a commercial standpoint.”

There has been a lot of commercial activity on the northeast valley of the 101, following the opening initial landmarks of Talking Stick Resort, Salt River Fields, Odysea Aquarium and Butterfly World, all built between 2010 and 2016.

Many of the new tenants are large corporate entities, including restaurant brands like Hooters and White Castle, and hotels like Days Inn. The hotel and lodging industry has increased its presence in the last year in the area by opening the Great Wolf Lodge, a family recreation lodging experience, opened last summer, and a Home 2 Hilton under development that is slated to deliver in 2021.

A senior living facility has been one of the missing resources for the area, known for its affluent retirees and "snowbirds" from eastern and northern U.S. markets that live in Arizona over the winter, usually in second homes. To match the demand for residential housing in a market dominated by a senior demographic, Legacy Village of Salt River broke ground in January 2018, and is part of the 232-acre Pima Center Business Park.

Legacy Village will offer senior living, assisted living and memory care across 216 apartments with 36 different apartment design plans on the 600K SF property. All of the 114 units are designated for senior living, with a full kitchen and laundry room available in studio, one-bedroom and two-bedroom designs. An additional 72 apartments are allotted for assisted living, and 30 studio apartments are for memory care residents. It is still slated to open in mid-August.

“Our residents are due to move in early fall so there has been no impact with the coronavirus on our schedule,” Legacy Village Executive Director Michelle Redding said. “Since construction has been deemed an essential business, we have been able to carry on without any delays.” 

Floor plan flexibility is also a driving force for Sierra Bloom, a 900K SF healthcare and mixed-use development planned for the area. When completed, it will house assisted living, a behavioral health hospital, imaging, an ambulatory surgery center, urgent care, a hotel and retail facilities. Developers for Sierra Bloom said it has the ability to accommodate tenant spaces between 2.5K SF and 88K SF.

“This is Class-A building space that is meeting the growing demand of larger physician office space in the 10K SF to 15K SF range, by [providing] group practices that have been bought out by private equity groups or corporate healthcare systems,” Transwestern Senior Vice President of Healthcare Advisory Services Vince Femiano said.

“The smaller physician offices from 3K SF to 5K SF are not in demand nearly as much as acquisitions and collaboration now rule the industry,” he said.

Sierra Bloom will also feature Universal Health Services as a behavioral healthcare provider and a 120-bed hospital built in partnership with Honor Health, which has a traditional hospital located about a mile from Sierra Bloom.

The southern part of the development will feature a mixed retail presence, and there are plans to have a Holiday Inn on-site to cater to visiting family members and friends.

“There are challenges with the Old Town Scottsdale, downtown Tempe and downtown Phoenix market when it comes to Class-A building options,” Transwestern Senior Vice President and Phoenix Market Leader Mark Stratz said. “They have low vacancy rates combined with traffic congestion issues and it makes the case for the northeast valley even stronger.”

According to Stratz, the price difference between the Loop 101 business corridor in the northeast valley and popular high-cost Class-A destinations in Old Town Scottsdale, downtown Tempe and downtown Phoenix is substantial. Those markets can can cost between $10 and $15 per SF, a significant markup from the Loop 101 base price.

Large Fortune 500 companies and healthcare aren't the only businesses drawn to the area. For Spinato’s, a popular Phoenix-based pizza restaurant chain for nearly 50 years, location off the Loop 101’s northeast corridor means an instant connection to spring training tourists.

“We have Chicago-style pizza and being on the Loop 101 places us about 10 miles from the Chicago Cubs’ spring training stadium at the Loop 101 and Loop 202 interchange,” Spinato’s Director of Marketing Michaela Raner said. “We are 100% self-funded, so we are picky on where we expand, and the Loop 101 northeast area has everything we needed to open our sixth location.”

Pokitrition, a Southern California-based casual restaurant chain that will be located close to Spinato’s, is placing its fourth Phoenix location in the neighborhood. Pokitrition said its restaurant site will be 15K SF with an adjacent 800 SF ice cream parlor.

“We looked at the location almost three years ago, so we have had our eye on it for years,” Pokitrition owner Jimmy Lee said. “We have already been bombarded with questions if we are still going to open and without hesitation that answer is, 'Yes.’”

Lee’s confidence in the market is based on recent demand, he said. As physical space becomes more of a resource, the demand for large commercial real estate opportunities off the Loop 101 in the northeast valley will increase.

“The trend in this post-COVID market could shift more from urban to suburban office spaces,” Stratz said. “That is when the Loop 101 corridor will be beneficial. Scottsdale’s life of space with no subways is looking like a safer alternative for a work environment, and it is likely to stay that way for a long time.”