PICOR Connect | Trends in Commercial Real Estate

Mid-Year Tucson Industrial Update

Posted on Wed, Aug 24, 2016

Positive momentum accelerated in the Tucson industrial market during the second quarter, with vacancy improving to 8.6% on positive net absorption of 252,815 square feet (SF). After peaking at 13.4% 3Q 2011, market-wide vacancy improved to its lowest post-recession level, not reporting a sub-9.0% rate since 2008. Many projects reached full occupancy, with multi-tenant inventory inconsistently available. Of note given its nearly two million SF footprint, the UA Tech Park saw activity bringing its vacancy down to 2.0%.

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Economy

Preliminary Bureau of Labor Statistics data reported that Metro Tucson added 15,636 jobs year-over-year through May 2016, with total employment of 455,312 and an unemployment rate of 5.0%. With recent high-quality jobs announcements and expansion by current employers, the forecast is for continued improvement.

Economic optimism and consumer confidence were more-widely present, jump-started by Caterpillar’s decision to locate downtown, forecasting creation of 600+ jobs at an estimated economic impact of $600 million. Tucson’s steadily improving market performance was enhanced by this announcement and others, like the Comcast opening, new air service, and downtown activity including attraction of pro hockey, and retail, residential and hotel construction, both planned and underway.

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Market Overview

While the mining sector was still impacted by market pricing, homebuilding and construction both experienced growth locally. Business confidence was also evident in longer lease terms (up to five years) and owner investment in tenant improvements. Non-traditional space uses continue to be found in local activity, from breweries and distilleries to health and fitness uses and entertainment venues. That being said, growth was driven by broad-based, organic small business activity.

Sale volume second quarter totaled $11.7 million versus $8.5 million 2Q 2015. At $60 per square foot (PSF), the average sales price year to date outpaced 2015 pricing of $54 PSF. Clairemont Plaza represented the quarter’s largest sale, a $3.65-million multi-tenant industrial park sold for $54 PSF with 45.0% vacancy.

Outlook

With upward pressure on rents likely occurring at a threshold vacancy of 8.0%, we forecast improvement in Tucson's industrial rental rates and sale prices early in 2017. Money Magazine recently ranked Tucson #4 for millennials. Combined with a growing food and entertainment scene, our employment growth prospects appear strong.

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Topics: Tucson, Industrial, Economy, Commercial real estate, Investment property, Warehouse, Leasing