Disruption Opportunity as Arizona Adds Population and New Industries

Arizona is at the epicenter of an evolving dynamic that can best be described with a phrase uttered by a panelist at ULI Arizona’s Trends Day 2024—disruption equals opportunity.

Two panels at the 19^th annual event sponsored by the ULI Arizona District Council examined the primary driver influencing Arizona—growth—and what the development and commercial real estate industries are doing to secure the state’s economic future while embracing disruption that is leading to opportunity.

This includes providing the needed power as high-tech companies that make microchips and developers of data centers want to call Arizona home to an office market trying to rebound from COVID-19 (remember work from home?) by reimagining its assets.

Maricopa County, in which Metro Phoenix resides, has held the title of the fastest-growing county in the U.S. by numeric growth for the past two years. It added 56,831 residents in 2022, boasting a population of 4.6 million residents.

With this growth has come, well, growing pains. On the construction side, Arizona is experiencing a shortage of roughly around 400,000 workers. Salt River Project, one of the state’s two major utility companies, is looking at 45 data center projects and 25 manufacturing projects that will need power.

On the county’s northern edge, a massive, $40 billion semiconductor factory being built by the Taiwan Semiconductor Manufacturing Company (TSMC) is rising from the desert floor. And yet, while people are moving into the state, the residential and multifamily housing markets are just trying to keep up with the residents already living there.

“We really need to be thinking about powering our future. The biggest trend impacting the energy sector is growth. Maricopa County is the fastest-growing county in the U.S. We offer really good jobs. That’s important from the energy standpoint,” said Gary Dirks, Senior Director, Julie Ann Wrigley Global Futures Laboratory and LightWorks at Arizona State University. “Arizona has been about real estate and tourism, traditional industries. Now, it’s about tech. Chip factories. Data centers. We want them, but they take a lot of energy.”

Disruptive trends affecting the powering of Arizona’s future:

♦️ Electrifying everything, particularly vehicles. A lot of the technology in electric vehicles is eyeing Arizona.

♦️ Another trend in Arizona is heat. Metro Phoenix has one of the biggest heat island effects in the U.S., and the summers are getting hotter. This includes the higher temperatures at night that are putting stress of equipment.

♦️ The final trend is the closure of coal plants. By 2035, Arizona coal plants will either be closed or be in the process of closing.

“There is tremendous growth here in Maricopa County. TSMC, and all the growth sprouting up around it, will take a tremendous amount of capital. This is a different type of business,” said Jose Esparza, senior vice president of public policy for Arizona Public Service (APS), the state’s other large utility company.

Could battery storage systems, devices that enable energy from renewables such as solar and wind also be disruptive, but provide beneficial opportunities?

“There are lots of headwinds, but also a lot more tailwinds when it comes to renewable energy storage,” said J.D. Rulien, director, renewable development for NextEra Energy Resources. “We have to invest in developing these types of systems. Renewable energy storage is just a few years old. It will have national implications for the grid.”

Added Dirks: “The key to success of moving to net zero by 2050 is the partners here on the stage and in this room.”

The office market isn’t dead: It’s evolving

When consumers were introduced to online sales and the ease of ordering goods and having them appear on their doorstep, sometimes within hours, it was a true disruption to the retail real estate industry. Brick and mortar, tenants and owners were told, was dead.

During COVID, companies sent their office workers home to conduct business over Zoom, Microsoft Team Meetings, or whatever videoconferencing platform they were utilizing. The Trends Day panel “Reimagining Office Properties,” sought to reaffirm that the office market isn’t dead.

“There is a perception that office is dead,” said Yesenia Felix, vice president, operations and designated broker for Cousins Properties, Inc. “Where is office today? It’s evolving. It’s a new normal that will have to figure itself out the next couple of years.”

Cousins Properties owns Hayden Ferry Lakeside, a mixed-use trophy asset on an iconic 43-acre site on the south shore of Tempe Town Lake in downtown Tempe, Arizona. One of its major tenants was Silicon Valley Bank, which occupied 150,000 square feet (13,935.4 sq m) at Hayden Ferry Lakeside I. The bank was closed by regulators in March of 2023.

“We’re flipping it back to the winner side. As the oldest building at Hayden Ferry Lakeside, we’re making some upgrades in the common areas and a full remodel of the core areas,” Felix explained. “This includes adding amenities to areas where people can come and activate, including a gym on site and food and beverage.”

One novel amenity—and no, not pickleball—is a beehive installed in the parking garage. Employees can actually see the work that the bees are doing. The honey produced is shared with the tenants, Felix said.

“They enjoy seeing the process of hive to jarring the honey with our active beehive. We have Italian bees. They don’t sting as much. It’s about bees and beekeepers,” Felix added. “It’s about attracting talent back to the office. Arts, culture, and music. A lot of that is happening in the downtown Tempe area.”

Bryan Taute, executive vice president with CBRE agrees that a certain sector of office product is dwindling, and added converting it to other uses is a hard and complex thing to do.

“Hospitality and multifamily in an office setting is challenging for the owner, but also an opportunity to make something different,” Taute said.

“I do agree that office is not dead. It’s going through a major disruption,” Lindley said. “Frequently, fortunes have been made in markets like this. It creates opportunities.”

The panelists were asked if it was thumbs up or thumbs down in the short term for office buildings. There was a positive consensus.

“It’s wide open right now. There is a lot to choose from,” said Angela Johnson, vice president with asset manager K-Star.

“We have great momentum. I’m excited about the capital investment we are making,” Felix said. “In the short-term office should be a success. Opportunities exist in a market like this. Disruption equals opportunity.”