TSMC effect: Phoenix's northwest valley sees commercial real estate boom
While some parts of Phoenix's industrial market soften, the Deer Valley submarket is bucking the trend as semiconductor-related companies flock to the area.
Story Highlights TSMC's $165 billion campus drives industrial growth in Phoenix
Northwest Valley submarket sees low vacancy rates and high demand
Suppliers and contractors are keen on the Deer Valley area near TSMC
As goes TSMC, so goes Phoenix's industrial real estate market.
Suppliers continue to gravitate to the Valley, angling to position themselves in the orbit of TSMC's ever-growing, $165 billion campus in North Phoenix.
And while more industrial supply is set to come online in north Phoenix in the years to come — the $7 billion Halo Vista master-planned community could bring millions of square feet on its own — for the time being, experts suggest that limited supply in the Northwest Valley industrial submarket is keeping lease rates high and vacancy rates low. The submarket, which includes the TSMC complex and the popular Deer Valley area, is one of Phoenix's most desirable locales for industrial tenants.
The metro's industrial vacancy rate climbed to 12.2% in the first quarter even as building deliveries dropped 37.1% year-over-year to 7.4 million square feet, according to a recent report from CBRE. But the Northwest Valley submarket saw its vacancy rate drop 40 basis points 'as Deer Valley continues to draw attention caused by TSMC's investment announcement,' the CBRE report found.
Overall, the under-construction pipeline in the Valley has slipped to 11.1 million square feet during the first quarter, which is the lowest total since the first quarter of 2021.
Despite the attention on Deer Valley, only 10% of the of the industrial space under construction in Phoenix — just shy of 1.1 million square feet — is situated in the Northwest Valley. Meanwhile, 80% of the industrial construction activity is situated in either the Southwest Valley or Southeast Valley, CBRE found.
How TSMC effect is playing out for tenants
The lack of projects in the immediate pipeline, combined with the promise of billions of dollars in investments from TSMC, has created a wealth of opportunity in the Northwest Valley submarket.
'TSMC has had a dramatic effect on not just sublease, but the entire market. It has increased demand meaningfully,' said Jonathan Keyser, managing partner of Scottsdale-based tenant representation firm Keyser Commercial Real Estate.
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Jonathan Keyser, founder of Keyser Commercial Real Estate, pictured in 2019.
Jim Poulin | Phoenix Business Journal
The Arizona Commerce Authority currently has 336 manufacturers in its pipeline of businesses looking to expand or relocate to the state, including more than 50 semiconductor-related companies. Meanwhile, the Phoenix Deer Valley Airport estimated in 2023 that the surrounding area will see about 7.4 million square feet of demand for logistics warehouses, flex industrial and flex office by 2028.
Keyser imagines a scenario where the whole northwest Valley will eventually 'morph together' into a huge, semiconductor-heavy submarket.
'It's not going to happen immediately, but there's a lot of demand and there's a lot of interest in that area,' he said. 'So yeah, I'm very bullish on it.'
TSMC will be at the heart of the growth, he added.
'I truly believe that TSMC deciding to put their most advanced manufacturing in Arizona is the biggest thing to ever happen to Arizona in the history of our state from an economic development standpoint,' Keyser said. 'I think most people do not realize the outsized impact that's going to have. Them picking Arizona basically made Arizona the center of the universe when it comes to chips."
While Keyser's firm has been representing semiconductor companies for years, the Valley's reputation in the industry has suddenly exploded.
"Now everyone is calling us 'the chip guys,'" he said. 'It's all directly related to TSMC.'
Keyser said the commercial real estate market includes 'very large users' alongside smaller users and other companies seeking an initial first phase trial before deciding whether to engage in a larger expansion in the area.
'There's some that already have contracts with TSMC and Intel and others, and there's others that are looking to use this as a way to get contracts,' Keyser said.
Increased focus on Deer Valley submarket
While Keyser said clients are interested in space throughout the Valley, he noted that his firm has also engaged with Mack Real Estate on behalf of clients interested in Halo Vista, once that project gets up and running.
'We're in discussions with them with multiple users that want to be a part of that,' he said.
Sunbelt Investment Holdings Inc. is another company that has invested considerably in the Deer Valley submarket. The first phase of the company's Deer Valley Business Campus spans about 255,000 square feet and is mostly leased out, said Robert Harding, industrial development manager at SIHI.
Harding said the company, which has another 80-100 developable acres east of Deer Valley Business Campus, has seen a mix of tenants interested in acquiring space in the submarket.
'A lot of our activity is either a supplier of TSMC or it's a contractor of TSMC, or potentially contractors that just know they are going to be in the area for a while," Harding said.
Beyond TSMC's presence, one of the main benefits of the Deer Valley submarket is access to the entire Valley through both I-17 and the Loop 101.
'The fundamentals of the Deer Valley submarket in particular have stayed fairly strong and consistent for the past year or two," Harding said. "Obviously industrial in general saw a massive boom in the past three, four years since Covid. But the Deer Valley submarket in particular has been strong, where you may have seen some weakness in some of the other markets."
Clint Hardison, co-founder of IKE Commercial Real Estate, said his firm has had 'several requirements up in the Deer Valley submarket.'
'We have had clients come along that are wanting to come to the Valley because of TSMC,' he said. 'So that has happened, but I have not seen a lot of them wanting to be anything other than right up there in that Deer Valley submarket.'
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Clint Hardison, co-founder of Ike Commercial Real Estate.
Ike Commercial Real Estate
Hardison noted that the growing interest in Deer Valley can create opportunities for landlords throughout the West Valley as the price delta between submarkets continues to grow. He suggested 'it could make a lot of sense' for users to gravitate to industrial space in cities such as Goodyear and Tolleson, adding that landlords in those submarkets are likely to be more aggressive than what their asking rates suggest.
That means tenants can hunt deals in certain parts of the West Valley as vacancy rates continue to rise in the metro.
'When you actually get down to brass tacks in negotiations, there are landlords out there who are getting a little bit desperate,' he said. 'They will offer deals that they would not have even thought about offering 12 months ago.'
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