In the shade of office towers and nearby chase field, home of the Arizona Diamondbacks, there’s a warehouse that stands out from the desolate buildings around it. With millennials buzzing in and out in shorts and sandals, it resembles a beehive, right down to its yellow façade. For the past two years, this 30,000-square-foot renovated space has been the headquarters of WebPT, a web-based electronic medical records company for physical therapists. But having quickly grown to more than 300 employees, WebPT will be taking over an even larger warehouse next winter—a 128,000-square-foot building across the street that it will share with a tech campus for Denver-based Galvanize, which provides coworking spaces.
Quality of Life
This southern edge of downtown Phoenix, pocked by long-abandoned rail yards and grocery depots from the 1940s, speaks volumes about the region’s economic history and its future. The city’s urban core experienced long periods of blight in the second half of the 20th century as the population spread out across Arizona’s vast Salt River Valley, creating a metro area of 33 tightly connected towns and cities that covers about 9,071 square miles and is home to 4.5 million people. But in a sign of the city’s resurgence, today this part of downtown is being marketed as the Warehouse District, and its buildings are being gutted, renovated and outfitted to house tech firms and other startups.
It’s a turnaround from the crisis Phoenix faced just a few years ago. In 2009, the Valley—as locals call the patchwork of communities that compose this metro area—had spiraled into an economic downturn caused by overbuilding, the housing crash and the resulting recession, which at its worst left more than 10 percent of the area’s population unemployed. Planned communities and residential high-rises sat vacant or unfinished. The crisis in Phoenix wasn’t just a reflection of the times, but of the region’s flawed economic approach: an over-reliance on real estate development.
“That’s what has driven the economy in the past,” says Tim O’Neil, a fifth-generation Arizona native and cofounder of Ironline Partners, a local real estate investment firm. “Real estate was essentially a one-or two-trick pony.”
One constant bright spot has been tourism. The Valley’s mild winters and dramatic landscape against the backdrop of the Sonoran Desert have attracted snowbirds since the 1920s, fueling a $13 billion a year industry. The nearby city of Scottsdale, with its iconic Camelback Mountain, has become Phoenix’s playground, with an abundance of golf resorts and spa retreats, upscale shopping centers, restaurants, art galleries and museums, and easy access to outdoor activities such as hiking and mountain biking.
Still, some community leaders were aware enough of the need to diversify to lay the groundwork for change. In the 1990s and early 2000s, forward-looking state legislators took notice of emerging businesses in the Valley, particularly technology, and worked to create a minimalist regulatory environment for corporations. Their initiatives included offering low taxes and a variety of incentives—such as data-center tax exemptions and tax credits for angel investments and R&D. Technology was not new to the area—Motorola and Intel have long had operations in the Valley—but the sector remained small and mostly focused on semiconductors. As the recession took its toll in 2008 and 2009, this regulatory foundation paved the way for recovery.
In February 2008, physical therapist Heidi Jannenga and her husband, Brad Jannenga, a software engineer, launched WebPT in the back of a coffee shop a few blocks from its current location. The business experienced 300 percent year-over-year growth for its first three years, allowing the couple to establish the viability of their product before seeking funding. “We kind of debunked the whole Silicon Valley model,” Heidi Jannenga says. By the time they received $1 million in angel funding, the company was profitable and turned that investment into $17 million within two and a half years. According to Heidi Jannenga, WebPT is on track to reach its goal of $100 million in annual revenue by 2020.
The Jannengas were catalysts for the Phoenix startup community, but other, bigger players at the time followed their lead. In 2010, San Francisco–based Yelp—then largely unknown—opened its third sales center in Scottsdale. It was soon joined by other Bay Area tech firms such as Weebly, a web-hosting service, and Zenefits, an online HR company. In 2013, Apple established a campus in Mesa (a suburb 20 miles east of Phoenix), and last year Uber opened a center in Phoenix.
“This is where companies come to scale. Here people can innovate without regulatory burdens,” says Chris Camacho, CEO of the Greater Phoenix Economic Council, a public-private partnership that aims to attract and support businesses. Among the factors that make the city ideal for tech companies: the presence of Arizona State University, one of the country’s largest research universities; the quality of life provided by tightly knit urban centers that are also close to nature; a new light-rail network that lessens car dependency; inexpensive real estate; and proximity to California. “We have an easily accessible market to test and to disrupt,” says Camacho. In April, Google announced that Phoenix will be one of four testing sites for its experimental self-driving Lexus SUVs.
The tech boom in Phoenix has deep implications for the local community. “People here are learning more about how to invest in technology and not just real estate,” says Nate Curran, interim executive director of the Center for Entrepreneurial Innovation, a business incubator that focuses on biotechnology, renewable energy and medical devices. He and other entrepreneurs are hoping to educate and cultivate a new breed of investor in the city to diminish the area’s hypersensitivity to the ups and downs of the real estate market.
The Valley faces some challenges. Population growth has been largely unmanaged over the past 60 years, and the threat of overdevelopment remains as the housing market heats up again. At 4.5 percent, unemployment is on par with the national rate (5 percent), but median wages remain low. And the area’s famous quality of life is compromised by air pollution, primarily from cars and desert dust. The American Lung Association ranks Greater Phoenix as among the 25 worst metro regions in the country for air quality.
But if Phoenix’s pivot to technology is any indication, the community is prepared and flexible enough today to maintain the progress that it has made. “We’ve proven our value. We’re on the cusp of becoming a world-class and certainly a national-class market,” says Camacho of the Greater Phoenix Economic Council. “We want to create the new American city—multicultural, international and embedded with industries and technologies that are disruptive and emerging.”
This article originally appeared in the 2016 June/July issue of Worth.