Home prices increased in June, thanks to inventory at a 21-month low coupled with steady consumer demand and favorable interest rates. U. S. consumer confidence was up significantly, and personal income statewide slightly outpaced the rate of gain nationally.
At the year’s midway point, Tucson’s overall office market reported no measurable change in occupancy or lease rates. Absorption trended positive in the city core for the sixth consecutive quarter, with only one negative quarter since Q3 2012. Non-CBD space continued to trend slightly negative.
Market interest and traction was higher in the second quarter, with several active requirements in the 6,000 to 10,000 square foot (sf) range. We noted a shift from past compression of space to growth, first in financial services, including UBS’s relocation to the Foothills, backfilling Morgan Stanley’s former space. Call centers and health-related services also expressed demand. Centene took 52,000 sf of sublease space at 333 Wetmore off the market, as well as 20,000 sf in midtown. Additional behavioral health users funded by the regional umbrella organization will continue to take down space.
Quality investment properties attracted national investor interest, but marketed inventory remained low. The sale of 1617 E Skyline in the Foothills, a newly-constructed, 19,761-sf asset fully-leased to Morgan Stanley represented the quarter’s largest sale at $9.05 million, or $457.82 per sf. A strong lease rate and credit tenant combined to influence this low cap rate sale. User purchases in the office market were more limited, as lease occupancy costs continued to be more cost effective.
Tucson’s primary economic drivers have experienced concurrent headwinds. Federal and state budget constraints impact the Air Force Base, defense contractors, and the University of Arizona, while the mining industry and homebuilding are at low points in their market cycles. That being said, positive activity in the Tucson marketplace included Comcast’s announcement to employ 1,125 customer service representatives in Tucson, and local investment by national healthcare systems. The Carondelet acquisition and partnership by Tenet Healthcare is expected to close in the fourth quarter, bringing strength to a three-hospital system which has sustained losses in consecutive fiscal years. In closing, passage of the upcoming fall bond initiatives would represent a stimulus, proposed City of Tucson charter change would be positive for the region, and the Tucson Metro Chamber is leading efforts to add direct air service and streamline business approval processes.
Sources: BLS, CoStar, Eller EBRC, Tucson Assoc. of Realtors
Photo by William Dobbs