PICOR Connect | Trends in Commercial Real Estate

Tucson Office Market Posts Highest Occupancy in 7 years

Posted on Tue, Oct 18, 2016

As a result of steady, organic recovery and job growth, surplus and sublease office space in the Tucson market has largely shaken out. Overall market vacancy hovered around 12.0% for six solid years. At its current 11.5%, Tucson office vacancy is at the lowest point since Q4 2009. The data reveal a strong differential between older and newer buildings, with those built prior to the new millennium sitting at 13.9% vacant, and those built since 2000 enjoying a much healthier 6.0% vacancy. Absorption for the year is on pace to exceed the prior two years, standing at 289,278 square feet (SF) through the end of Q3.

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Sales activity in 2016 has not been for the faint of heart. Pricing, cap rates, financing and valuations have varied widely, primarily due to disparate motivations. The distressed seller would accept almost any price, while at the other extreme, some buyers pay a premium for that “right” property or investment. User purchases to date in 2016 represented about 75% of transactions by number, while dollar volume has been fairly split between users and investors. Prices paid by users varied widely, often for similar properties in the same development. Cap rates ranged from the low 6% to the high 10% range.

Tower cranes are active across the market with office, health-care, and hospitality projects well underway. Specific to office, buildings are under construction for the Girl Scouts on Broadway, at Puente Nuevo on Ft. Lowell and Marana Health Center in Dove Mountain. With a segment of the office stock functionally obsolete, many older properties may be destined for demolition, consistent with the trend toward desirability of newer spaces.

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ECONOMY

Greater Tucson was recently named the third fastest-growing metro area over 500,000 population by Bloomberg, with July year-over-year job growth of 4.2% in July, 2016 and total employment of 378,050. The national housing recovery has improved Tucson’s prospects for population growth and is expected to spur construction. Arizona was the only state in the U. S. to experience month-over-month construction job gains in July 2016, and was one of three states to report year-over-year growth. Nationally, September consumer confidence was at the highest level since 2007.

Outlook

Tucson is gaining attention for all the right reasons, on the heels of recognition as a top city for millennials. The food scene has garnered national acclaim after being named the U. S.’s only UNESCO City of Gastronomy. Three Tucson schools were ranked in the top 25 by U.S. News & World Reports. Tucson’s existing businesses, both large and small, have been quietly growing headcounts and have arguably accounted for the Tucson region’s path to vibrancy over 24 months. Recent hiring and growth announcements will add future positive impact. Planned hiring by Caterpillar (600 jobs), Worldview (448), ADP (400), C3 (1,132), Samsung SmartThings (80), and Tucson Medical Center (61) combine for a forecasted economic impact of over $3 billion. And other announcements have occurred, with more expected. The momentum is palpable, and the outlook is extremely positive for Southern Arizona.

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Topics: Tucson, Economy, Commercial real estate, Investment property, Leasing, Office, Medical office