Another BEX Private Development Summit is in the books. Given the far-flung challenges and wide-ranging sets of issues affecting the sector this year – from the years-long labor shortage, to the ongoing (and mounting) supply chain/materials issues, to the more recent specters of increasing inflation and reduced liquidity –attendees and presenters were remarkably upbeat about the state of affairs and Arizona’s place within it.
As she usually does at the start of major BEX events, President and Founder Rebekah Morris led the room in an updated overview of the state of the Arizona construction market and economy.
She kicked off her comments to the crowd of more than 200 by reminding everyone, “Economically speaking, 2020 was pretty good. Everything else was in the tank, but, economically speaking, market activity for 2020 was pretty good. 2021 was much better than that. Interesting note: When you look at the actual economic activity, taxable sales tracked by the Department of Revenue, 2021 saw the largest year-over-year increase ever in the total statewide economy across all market sectors – 19.79% year-over-year.”
She then listed a series of contributors to that increase including: population growth, employment growth, corporate relocations to the state and massive capital investment in the region.
For the construction segment of the economy, Morris pointed out there are several challenges and constraints facing the industry. “We do not have what’s always an easy path when it comes to delivering projects,” she said. Among the challenges she listed were the ongoing labor shortage, materials shortages and unavailability, price increases, and plan review/approval/NIMBY-ism resistance to getting new projects in the pipeline and permitted.
A highlight of her introduction was pointing out that construction as a sector has consistently made up approximately 10% of the overall Arizona economy, down from percentages of between 15% and 20% between 2004 and 2008.
“We’re less of a driver, which is honestly a good thing. We’ve talked about this a lot since the last recession. The Arizona economy needs to diversify. Now we can see those efforts have clearly paid off.”
Looking at total construction activity in the state, Morris noted a high of $21.67B in 2006, followed by a catastrophic drop to just $8.44B in 2010. The intervening years between 2010 and 2021 show a relatively consistent growth pattern until the sector really started to accelerate in 2018, when the total hit $12.93B and expanded to a 2020 total of $17.7B.
2021’s total, however, increased only comparatively slightly to $18.06B. Taken in terms of percentages, the rate of annual change from 2017-2020 exceeded 10%. For 2021 it was just 2.03%. Morris also pointed out the amounts are not adjusted for inflation. As a result, due to across-the-board price increases, it is safe to assume real activity actually declined.
Moving into the market segmentation portion of her overview, Morris shared with attendees the fact that brought them to the Summit event in the first place: The rate of growth in Private Commercial Real Estate Construction. When BEX first started performing these market analyses eight years ago, the market was evenly segmented between Public Infrastructure, Housing and Commercial Real Estate. Now, however, Public Infrastructure makes up just 22%. Housing has remained fairly consistent at 33%, but CRE development has surged to 45% of Arizona construction across Healthcare, Office and Retail, Hospitality and Industrial, with Morris calling the latter “the 800-pound gorilla in the room.”
When covering Industrial specifically, Morris showed the sector has exploded, going from nearly 6.1MSF under construction in 2018 to 11.9MSF in 2019 and 27.5MSF in 2021. “It’s enormous. We’re becoming a little desensitized to how much volume, how much activity that actually indicates. It’s unreal.” Talking about speculative developments and pre-completion lease ups, Morris said, “We cannot build it fast enough for the demand that’s out there.”
Building is one thing. Occupancy is, sometimes, another. Industrial’s tenant demand, however, continues to outpace its build rates. In 2009, the sector hit a top vacancy rate of 16.1%. Vacancy plummeted to 3.1% for 2021 and dipped further to 2.9% for Q1 2022. “I don’t know how it can go any lower,” Morris said. “Demand is absolutely there for Industrial spaces. We’re not building them fast enough.”
Based on DATABEX project-level data, Morris is projecting explosive growth in the sector this year. “The biggest single year of projected increase in Industrial construction is between 2021 and 2022,” with project values under construction increasing from $5.16B in 2021 to $9.28B in 2022, a year-over-year change of 79.8%. “We have the project data to say, ‘Hey, we want to add 80% to that already enormous market sector.”
In concluding her remarks, Morris pointed out Industrial will continue to dominate, particularly if a proposed federal program to invest in chip manufacturing goes through.
Readdressing the state of the market in her conclusion, Morris reminded attendees that, while Industrial and Multifamily were big before the pandemic and have only gotten bigger, the challenges facing the industry are ongoing across sectors and segments. The market is being held back due to NIMBY-ism, plan reviews/approvals, “whack-a-mole”-style materials availability, and prices that will continue to escalate due to availability and demand pressures. In short, 2022 can expect to see the same levels of construction as 2021 unless capacity is somehow increased.
Pinal County Overview
After Morris left the stage, event emcee Jade Nunes of Cuhaci & Peterson Architects introduced James Smith, economic & workforce director of Pinal County for a quick overview of the area’s current and future states of development.
Major activity in Pinal the past few years has centered around the explosive growth of industrial companies locating or planning to locate there, including alternative fuel vehicle and other advanced manufacturers like Lucid Motors and Nikola and, most recently, battery manufacturing giant LG Energy Solution.
Smith attributed Pinal’s current wave of prosperity to several factors, including foresight in working to create multiple industrial parks to accommodate a variety of prospective tenants, early targeting of cutting-edge and high-tech manufacturing and service suppliers, an abundance of available and well-managed State land, and a growing and educated workforce.
To that end, he praised the County’s partnerships and investment in workforce development, including the Drive 48 Training Center created through a partnership between Pinal County, Casa Grande, Central Arizona College and the Arizona Commerce Authority, as well as the development agreement with LG Energy Solution that includes a training program, center and incentive program to provide skilled labor for the battery plant’s ongoing operation.
Overcoming Challenges Facing New Development
Next on the program was an expert panel discussion moderated by Korey Wilkes, principal at Butler Design Group, entitled “Overcoming Challenges Facing New Development”. The panel was comprised of:
- Mike Bontrager, VP and general manager of Alston Construction,
- Ashley Marsh, land use & zoning partner at Gammage & Burnham, and
- Alan Stephenson, Planning and Development Department director for City of Phoenix.
Wilkes kicked off the discussion by asking panelists to identify the biggest problems they encounter in their practices. Marsh responded that staffing, including design staff, is a challenge. She added all projects have become more difficult and entitlements and timelines have gotten longer, an issue that is difficult to convey to owners that are eager to move quickly. She commented there is no quick fix, no easy deals and that sellers are growing more impatient.
Stephenson agreed, saying sellers do not want to give big entitlement windows, but that both timelines and the level of public involvement with the entitlement and approval process have grown. He explained it is essential to work with members of the public as completely and as early in a project’s planning cycle as possible because social media has broadened the public’s exposure to projects, and the City Council is beholden to its constituents’ concerns.
Other challenges Stephenson mentioned were rising physical infrastructure costs and the need to provide not just planning staff but also services staffing, such as utilities and public safety, to care for projects and occupants once they are in place.
Bontrager’s concerns echoed the other panelists, particularly in terms of the pressing for speed to market. He said new developers, particularly those coming to Arizona from other states and regions, need to be educated as to how business is conducted here and on the need for partnership and working in concert with other firms.
Wilkes’ next question asked for insights into the staffing problem. He wanted to know how the panelists were attracting their workforces.
Stephenson said that when the economy is strong, public institutions have even greater difficulty attracting talent. He pointed out that, in the current market, even entry-level staff is hard to find. He said Phoenix has worked with human resources staff to scale back its more onerous barriers to hiring to the fullest extent possible. The City is now conducting and participating in job fairs and similar activities that can dramatically cut the time from interview to offer, even though the standards for background checks and qualification verification remain in place and neither can nor will be eliminated.
Bontrager praised the recent efforts of industry and trade leaders to return to promoting skilled work as a desirable career path for young people. The trades have been neglected for decades, and promoting their value is essential as the workforce ages and new workers become even more desperately sought.
Returning to the time-to-market issue, Wilkes polled the panel members on how they are trying to address it.
Bontrager said it is essential for general contractors to get on board and involved in the process much earlier than they have historically. This is particularly essential in determining what materials will be needed and getting them ordered or scheduled as far in advance as possible. He stressed constant communication between all parties, with cross talk and team development across disciplines.
Marsh stressed the need for all the parties to work together, especially in the entitlements phase. She praised the advancement of communications technologies such as electronic meetings and submittals that have improved collaboration and reduced the need for physical travel to discuss or submit items.
Stephenson advocated varying processes so that if one portion is delayed or backlogged, work can still continue on the portions that are not impacted, rather than expecting or waiting for a step-by-step and linear process across the board.
Next, Wilkes asked the panelists to discuss rising costs. Bontrager pointed out that costs are on their way to no longer being able to pencil out. He observed Industrial development costs have gone from $60SF up to $85/SF, and per-unit costs in Multifamily have gone from $159K up to $206K.
Marsh also lamented the cost increases but found a saving grace in companies from outside Arizona coming here to develop projects. She pointed out that prices here are not as intimidating to companies used to working in hyper-inflated markets like California, Chicago or New York.
She stressed, however, it is imperative to keep timelines realistic because more time spent always means more money spent. “Entitlements and delays are costing more than materials and labor,” she said.
Stephenson stressed the importance of outsourcing duties whenever it is an option and also teaching staff they are part of the process. As a result, they need to work with companies and customers to solve problems, rather than merely checking off boxes on a process document.
Last came question that seems to weigh heaviest on everyone’s minds in a program like the Summit: What is coming down the road?
Marsh said the market, like the overall economy, is facing challenges, but she expressed optimism that, given the momentum in place at the moment, “We will slow, but not crash.” Her fellow panelists largely echoed her sentiments, with Stephenson adding, “We aren’t overbuilt.”
Quick Hits
Next up, Banner Health VP Mark Barkenbush provided a quick summary of the healthcare giant’s current pipeline of projects. In addition to the projects currently in development and under construction, he said the company is closely monitoring growth in Pinal County to determine when to move forward and enter design on its next planned expansion of the Banner Ironwood Medical Center.
“Our biggest challenge, frankly,” Barkenbush said, “is the unprecedented escalation in costs. For us in particular, coming out of the pandemic, we had some pretty tumultuous times. 2020 was a strong year for us, largely due to stimulus funding we were able to get a good share of. 2021 was not quite the same. There was not as much stimulus money available, and we have incredible amounts of external contract labor at just unbelievable rates per hour. Labor is sky high, so we had a very challenging 2021 financially…. There’s quite a bit of optimism in our organization, though. We’ve gotten a lot of our expenses under control. A number of things have turned around. We’re projecting finishing the year with a modest operating gain.”
Following Barkenbush, Taiwan Semiconductor Manufacturing Company Senior VP Brian Harrison addressed the crowd with an update on the state’s leading private development. While the Phase I development received, and continues to receive, ample and ongoing coverage in both the trade and general media, Harrison surprised some attendees by disclosing Phase II was unannounced and is currently under construction.
For comparison, the two semiconductor fabs under construction by Intel in Chandler are smaller than TSMC’s Phase I development.
The far greater surprise came, however, when Harrison detailed what could be 10-to-12 continuous years of construction and development at the 1140-acre north Phoenix facility.Harrison said future expansions in Arizona are possible and will depend on how well the location performs once it starts operations.
The Growing and Changing Face of Industrial
Following a brief break, attendees returned for the day’s Industrial panel moderated by Braden Blake, studio manager at Ware Malcomb. Panelists for the discussion were:
- Todd Peters, VP of Industrial Construction for Clayco,
- Brett Shaves, president of Newport Commercial, and
- Tony Lydon, senior managing director at JLL.
Following brief introductions and updates about current efforts, Blake jumped into the topic discussion by asking the panelists to identify the current demand factors in Industrial. Lydon led off by commenting on the dramatic increase in ecommerce and its projected doubling in scale over the next five-to-seven years. He added this has been facilitated by international companies expanding to the U.S. and by excellent infrastructure investment in Arizona and Greater Phoenix.
Shaves concurred and said a key factor is how the area is positioned to meet demand, noting there is an ease of use, structure and solid land use planning in place here. Peters added demand has benefitted from changes in relationships and that projects that may start out as speculative acquire tenants during the planning and construction processes. As a result, potential tenant options are planned from the very beginning.
Blake then asked how things are changing in terms of schedules, costs, approvals and other factors. Lydon answered there is much greater uncertainty than there once was and that now conversations center around innovation and unique challenges, including how to navigate mitigations.
Shaves agreed, saying there is a lack of certainty now on the back end. It is impossible to know where the market and demand will be in the future, and there is no way to know how much or how fast costs will change.
Lydon replied the current circumstances are mix of good news/bad news, adding that creating a solid team is essential in making a schedule that meets expectations.
Peters commented it is impossible to get pricing on some materials. Shaves said the need now is to keep options open for new tenant types that can be built for under new constraints.
In terms of helping to manage the constraints, Peters noted the current environment is a whole new process, including general contractors coming into the project and starting to deal with materials in some instances before entitlements are even in place.
Turning to the expected slowdown in the economy, Blake asked what could start the slowdown and how much runway exists in the Greater Phoenix market.
Lydon said Arizona has a good regulatory structure, a qualified workforce and a good employer reputation, so it should be able to weather difficulties fairly well. Shaves agreed and added the volume of business relocations is a major positive factor at the moment. Both said water resources and access need to be managed aggressively.
Peters said the outlook actually looks great and pointed out the scale to which technology has already helped to mitigate the labor shortage, add efficiency and reduce the scope of on-site staff needed for a project.
Turning to the ever-desired future projections, Peters said infill will continue to evolve as a focus and a driver, with an increasing need to answer the question, “How do we redevelop existing facilities.”
The other panelists agreed, with Shaves pointing out land is getting more scarce. There is, however, plenty of runway, he feels, saying there is enough land for 10-20 years if we use it correctly.
Prasada Update
The next Quick Hit was a fast-paced update on Prasada by SimonCRE CEO and Founder Josh Simon. After a brief overview of the project history, including the challenge having to start calling potential tenants to ask for commitments starting in March of 2020, Simon detailed his close work with the City of Surprise to identify exactly what tenants residents wanted and needed to occupy the 700KSF development.
He then announced that not only do the signed tenants match the City’s ideal requests, but that the project is now 100% committed for all spaces. Simon then presented a quick breakout of Prasada West and the project’s restaurant core.
Simon then moved on to the next phase, which will incorporate a planned 540 multifamily units into the development, along with more mixed-uses.
The next project on the list was the Surprise City Center, a multiphase development that will include a mixed-use of retail, restaurant and entertainment.
From the Exburbs to the Suburbs
The day’s final panel discussion, “From the Exburbs to the Suburbs,” focused on the pace of CRE growth in areas once considered to be outlying. Jeff Fairman, economic development specialist for the City of Eloy, moderated the group, which consisted of:
- Harry Paxton, economic development director for the City of Goodyear,
- Kirsten Hall, business attraction project manager for the City of Surprise, and
- Marissa Garnett, economic development coordinator for the Town of Queen Creek.
The panelists started off taking about their municipalities, demographics and needs. Queen Creek is seeking more restaurants, more office space for medical and small office users, more hospitality and hotel and more speculative industrial.
Surprise is seeking to add multifamily, office condominiums, medical office and specialty medical.
In Goodyear, 91% of residents currently work outside the area. Multifamily has doubled since 2017, and the City is looking to promote class A office.
Looking at the challenges facing their communities, Garnett said Queen Creek had gone from retail to manufacturing and big projects. Risk mitigation is an essential component in the economic development process.
Hall said workforce strategy development is essential, as there is a risk of creating and attracting more jobs than there are qualified workers to fill them. She referenced the Workforce Strategy 2.0 approach Surprise is working on and focusing on education intervention, getting involved in the education process and recruiting students at a young age and becoming a familiar presence.
When asked what’s driving prospects in their areas, Paxton said time to market from proposal to construction is an increasing difficulty, as is workforce development. Hall agreed with the time to market issue and said developers need to come over-prepared if they hope to keep processes smooth.
Garnett said her opportunities center around having large amounts of land but with a need for workforce and infrastructure in place.
Asked to give advice for the approval process, Paxton admonished developers to identify planner and reviewer preferences and to ask for comment review meetings. Hall recommended going through all the process specifications and requirements in advance, and Garnett urged them to involve planning and economic development staff in the process as early as possible.
Fairman agreed, saying, “Every shortcut costs you more time when dealing with municipalities.”
Closing Thoughts
With the conclusion of the panel, Nick Wood, senior partner at Snell & Wilmer, was brought up to provide his closing thoughts on the day.
After a few humorous observations, Wood pointed out the current state of affairs is a mix of good news and bad news. The good news, said, is the current economy is great. He added that Arizona has finally diversified its economy so it is no longer entirely growth-based, so when growth slows, as it will, the state is not likely to be hit as hard as it had been in previous downturns.
Who Can Say What’s on the Horizon?
Another BEX Private Development Summit is in the books. Given the far-flung challenges and wide-ranging sets of issues affecting the sector this year – from the years-long labor shortage, to the ongoing (and mounting) supply chain/materials issues, to the more recent specters of increasing inflation and reduced liquidity – both attendees and presenters were remarkably upbeat about the state of affairs and Arizona’s place within it.
Only time will tell if that degree of optimism is prescient or whistling past the graveyard. One thing that can be said with certainty, regardless of what negatives the near- and mid-term future bring, the Arizona market is better off with experts and leaders like the ones who offered their insights during the Summit than it otherwise would be.