PICOR Connect | Trends in Commercial Real Estate

Tucson Industrial Market Mid-Year: The Good, the Bad & the Ugly

Posted on Thu, Aug 07, 2014

For the sake of ending on a positive note, let's do the good, the bad, and the ugly in reverse for this mid-year Tucson industrial market overview: 

The ugly: Job creation. 'Nuff said.

The bad: Consolidations move control and decision making out of the Tucson market; transition of higher wage jobs (with potential to be construed as 'ugly').

The good: More lease signings in the 10,000 to 30,000 sf range; firming of lease rates for some smaller 'incubator' spaces; new construction forecast in the second half of 2014.

Tucson industrial good bad ugly

ECONOMIC OVERVIEW

The unemployment rate for the Tucson metro area ended May at 5.8%, 60 basis points (bps) lower than year end and 50 bps below the national rate. Decreased government spending impacted both Tucson’s market momentum and activity. Home prices and inventory flattened in the second quarter, while Tucson residential listings increased. In Mexico, the economy continued to grow steadily, with automotive manufacturing on the upswing.

LEASE MARKET

All ten of the largest leases signed in Q2 2014 were over 10,000 sf for the first time since Q4 2009. Many of the larger leases were moves to expand, as distributors and manufacturers relocated and availed themselves of competitive lease rates. While net absorption for the quarter was a negative 87,033 sf, the Southwest Door facility closure of 146,931 sf offset otherwise positive momentum in smaller spaces. Quoted lease rates began to increase in smaller spaces, yet we continued to advise landlords with vacancies over 5,000 sf to pull out the stops to retain tenants. More recently, price wars placed Tucson industrial offerings, particularly those over 50,000 sf, in direct competition with space in Phoenix.

The Tucson industrial market naturally takes a pause in the summer months, yet inquiries to the Tucson area economic development offices increased toward the end of Q2. With the periodic shedding of some of its leased locations, Raytheon’s contraction made way for other users, with call centers the most active.

SALE MARKET

Lacking significant drivers, the market was thin on the investment side, and dominated by user purchases in the second quarter. The largest investment sale was the $3.85 million sale of 3759 N Commerce, leased to Southwest Ambulance, while the largest user purchase was Concrete Designs’ 52,592 sf building on Broadmont.

OUTLOOK

After two quarters without industrial construction, expect a window of development to open in the third and fourth quarters, thanks to an impact fee moratorium at the City of Tucson. While uncertainty surrounding Davis Monthan Air Force Base’s missions and future gives many pause, the University of Arizona remains a bright spot as a locus driving research and innovation. Eller College’s George Hammond also states, “With federal fiscal drag expected to dissipate in the near term, the door is open for faster state growth.” 

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Sources: CoStar, Eller College, Tucson Assoc. of Realtors

Topics: Tucson, Industrial, Investment property, Absorption, Market trends, Vacancy, Lease rates, Warehouse