During my Q1 2012 Industrial Market update presentation for the Pima County Real Estate Research Council, I noted the schizophrenic market we seemed to be in at the time; a market which seemed to experience large swaths of space coming available and being absorbed, with the end result being no noticeable net gain or loss. This comment is also true today. For example, we watched a 100,000 sf industrial building on Belvedere get absorbed in a sale transaction which included a business expansion, while several miles away the American Airlines call center was coming available. We saw a 110,000 sf building near the airport come available as the occupant moved location and consolidated, yet we saw that building sell to a user who is planning to expand its operation, which transaction results in a reported absorption of that entire building. More recently, we’ve seen SOLON return a large chunk of its space to the market…yet the same space was put back into service by SOLON for the development of a new product line before it could be leased to a third party.
The point here is that, as evidenced by the anecdotes above, The Tucson industrial market in 2011/2012 was, and still remains, largely in a “holding pattern.” The overall market vacancy number backs this up: In 2007 we had a reported EOY vacancy in the 5% range, until we fell off the cliff in 2008. Since 2009 we have been largely holding steady, at vacancy numbers in the 11%-12% range. Bottom line: no noticeable recovery, yet no further erosion, has taken place over this time period.
While this assessment appears on the surface to be negative at worst and bland at best, it actually belies some market activity that is worth analyzing. The vacancy numbers have not stabilized due to an economic stalemate as it might seem. As partially chronicled above, there is actually some significant activity occurring. So what activity trends have we been seeing? Where do we expect this activity to come from in the foreseeable future? What does this mean for the market and the Tucson economy?
An answer to the first question helps to answer the second and third question. Here’s what we have been observing in terms of recent trends:
1) Call centers are back
2) Federal Government activity, which was extremely active (and seemed to account for all of the large absorption in 2009/2010) has waned significantly and
3) survivors and opportunists are making their moves
It is reasonable to assume that these trends will continue in the short-term. Therefore, let’s look into these trends in a little more detail.
Client chatter has informed us that many call-centers (not unlike many manufacturing operations) are currently undergoing a “re-shoring” process due to a combination of: negative customer experiences/feedback and the closing of the cost-gap between the US and certain foreign countries. Tucson, specifically, has a national brand of being fertile ground for call centers due to a low cost-of-living, an equally-low income expectation, and strong bilingual workforce. We have heard positive comments from recent call center operators who have expanded in Tucson. Recent call center expansions in Tucson include C-3, OptumRx (United Healthcare) and AFNI. And our conversations have yielded what appears to be an appetite for more.
The Federal Government had been extremely active, signing a plethora of deals for it’s alphabet-soup of agencies during 2009 and 2010. These deals included US Marshals, DEA, FBI and ICE. The capital for these transactions originated with the astronomical Federal Stimulus plans pushed through during that time. While we can argue about the wisdom and long-term implications of this kind of “monopoly money” deficit spending, it did result in some local activity which, at the time, was noteworthy. Fast-forward to 2011/2012 and these deals have all but dried up. (Example: A recent large GSA RFP was put on hold.) The federal government and the electorate seem to be more focused on deficit reduction at present, and the current election cycle will not permit more bold (or “foolish,” depending on your political persuasion) action such as this. In the near future, therefore, it is not likely that we’ll see a return to the same frenzied level of Federal Government activity experienced in 2009/2010. But watch the election, which might have a bearing on this one.
Survivors and Opportunists
One noticeable trend in 2012 has been the emergence of activity driven by self-described “survivors” and other well-financed opportunists. This is good news, and strong evidence that we have indeed touched bottom. A plethora of transactions have recently or are currently occurring involving such groups as: contractors (this is NOT a typo!), material suppliers, Phoenix-based companies and manufacturers. The common thread: they consider themselves “survivors” of the downturn and feel ready to make their move. In many cases they have watched their competition fall prey to the recession. They have effectively gained market-share through attrition, and correctly view real estate as being “on sale.” Companies in this position are wisely taking advantage of this situation and re-positioning themselves for the future. The other category is investors, who are taking advantage of Bank REO and Short-sale deals and other distressed purchases. This is occurring on a small, medium and large scale. A great deal of wealth is quietly being created via such aggressive acquisitions.
So, as we work our way through the balance of 2012 and look ahead to 2013, we are hoping for the storyline and trends to soon change from a market in which we must dig below the surface of the lackluster numbers in order to find optimism, to a robust market in which the numbers themselves loudly proclaim a robust local real estate and economic environment. Keep your fingers crossed!
Brandon Rodgers, CCIM is an industrial broker with C&W | PICOR. He represents transactions of all types within this category: Investment and user sales as well as leasing. His clients include small local companies as well as large regional and national firms. His current emphasis is on dispossessions of bank REO assets. He can be reached at 520.546.2714 or firstname.lastname@example.org.