PICOR Connect | Trends in Commercial Real Estate

Tucson office market follows on a strong 2012 finish in Q1

Posted on Thu, Apr 18, 2013

As with the national scene, quarter after quarter, we have cited the need for jobs to fuel a Tucson office market rebound. The State of Arizona reported significant job gains for the local market in February, with Tucson's unemployment improving to 6.7% from 7.3% in January. In the past year, 3,500 more jobs were added, largely in the education, leisure/hospitality and construction sectors.

BACK-TO-BACK QUARTERS OF STRONG ACTIVITY

Tucson OfficeFollowing on a strong finish to 2012, lease activity in the first quarter continued at a more active pace. Rents began to firm, with asking rates virtually unchanged over the prior quarter. For better properties, concessions tightened, while secondary and tertiary properties still struggled for attention at lower rates and deeper concessions.

Slight positive absorption of 37,829 square feet (sf) occurred, ticking the overall vacancy rate down to 11.9% - 10.4% downtown, and 12.3% in the suburban Tucson market. This followed Q4 2012 positive absorption of 82,506 sf.

The ‘flight to quality’ afforded by years of rent compression has left a significant inventory of space challenged by dated improvements and deferred maintenance.

Medical space remained the demand leader as the trend toward Accountable Care Organizations (ACOs) materialized in legitimate market demand. Tucson Medical Center’s state-of-the-art West Pavilion opens in May, freeing some 50,000 (sf) of medical office space on the TMC campus for new medical-related occupancy. This large amount of well-located space will put pressure on properties challenged by access to hospital campuses.

Tucson Office Market Statistics

 

INVESTMENT PRODUCT CONTINUES TO MOVE

High year-end investment sales momentum carried forward into 2013’s first quarter. The sale of 333 E. Wetmore (a class A, 142,000-sf multi-tenant property) in late March represented the largest stabilized investment sale in the Tucson market post-recession. Online auction has become a popular vehicle for disposition of foreclosed assets, most recently Wilmot Professional to a local investor at below $50 psf.

OUTLOOK

With tenant appetite for Foothills space and scarce supply, we still anticipate a user to trigger construction on a planned development. We also forecast outright sale of closed Tucson Unified School District (TUSD) school sites.

Downtown revitalization continued apace with two private projects under construction, Plaza Centro and 1 East Broadway, complemented by both planned and initiated projects including student housing, traditional apartments, retail, restaurant, and hotels. Development of the Tucson Modern Streetcar project will continue to keep all eyes on properties along its route.

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Photo credit: chelle

Topics: Tucson, Commercial real estate, Investment property, Absorption, Market trends, Vacancy, Lease rates, Leasing, Office, Medical office