Supply in the Tucson industrial market remains stable, with only one new industrial project under construction. We do hear of numerous proposed industrial developments in the region with 5,000-10,000 square foot (sf) bays. We expect supply of small-bay industrial (under 5,000 sf) to remain consistent until rents grow by 35%-50%.
While the Tucson industrial market has felt some COVID-19 effects, overall vacancy has risen only slightly to 7.3%. Vacancies in the Downtown submarket have filled quickly. With continued absorption of small bays, vacancy rates in the Downtown and Palo Verde submarkets are at an all-time low of 2.3% and 3.4%, while the Park/Ajo submarket dropped from a vacancy rate of 12.5% to 9.9%.
Most industrial demand is fueled by the housing market, as builders need trade-related suppliers and services. The forecast for housing demand is a bright spot, due to in-migration from California and other states. We can expect healthy demand as long as the housing market, defense, and mining industries are strong.
Land demand remains muted with a stable inventory of available buildings for sale and lease. User acquisitions of industrial buildings continue despite the virus’ impact on the economy. Investment activity is also balanced, with a limited number of properties on the market for sale.
Amid the COVID-19 pandemic, more than 20,000 businesses in Arizona received economic relief from the federal government. Arizona’s unemployment rate has fallen from 10.7% in July to 5.9% in September due to nearly 80,000 jobs being added in August. Job gains were posted across ten private sectors, with the largest increases seen in health services, education, and transportation. After reaching a high of 13.1% in April, Tucson’s unemployment correlated closely to the state’s, falling from 10.7% in July to 5.9% in September versus a national unemployment rate of 8.8%.
Tucson industrial asking rents have been stable and rising slightly across the market, with the largest increases in the Northwest submarket where rates are up 8.0% over 12 months. Build-out plays a crucial role in rental rates increasing; spaces with more warehouse relative to office are in higher demand. Spaces with heavy office build-out are more challenging to fill, and lease rates are flat given the pandemic’s disruption of the office market. The Palo Verde submarket has also experienced rent increases, seeing gains of 4.0%-5.0% over the past 12 months. We expect rental rate pressure to spill over into the Park/Ajo and Airport submarkets. Mid to large-sized bays will also experience rent pressure, as the demand for distribution space continues unabated.
Contact our industrial team for specific questions on properties or submarkets in the greater Tucson industrial market.