Tucson’s retail market continued its robust growth with over 262,000 square feet (sf) of positive net absorption for this quarter, which exceeded the first and second quarter’s combined absorption of 256,205 sf. Pent-up demand in the market spurred an increase in retail space under construction from 123,402 sf in Q2 to 149,218 sf this quarter. Vacancy ticked-down slightly from 6.4% to 6.2%.
Tucson is following a national trend, transitioning retail storefronts over to service providers. Almost half of the largest lease deals this quarter followed this national trend from retail to service. The Broadway corridor continues to undergo change and redevelopment with new quick service restaurants (QSRs) consistently crowding the submarket. Most recently announced, two burger concepts, Habit and Graze will join Five Guys in the 5000 block of Broadway near Park Place Mall begging the question “is there saturation in the burger concept?”
Downtown Tucson continues to mature and grow. New residential and student housing projects are adding residents to the trade area making it more of a Live-Work-Play area rather than just a 9 to 5 weekday trade area. With this maturation and added residents, national retail brands continue to evaluate new downtown sites. Hospitality is on the rise, with the opening Q3 of AC Marriott on Broadway, and announcements for Moxie, and a Tucson Convention Center hotel. In addition, quality employers are bringing the “work” component to the ever popular Live-Work-Play lifestyle taking hold in urban areas in Tucson and nationwide.
The economic outlook remains positive nationally and in the Tucson region. The year-end 2017 U.S. real GDP forecast shows 2.2% growth year over year, with 2018 expected to be 2.4%. Natural disasters such as the recent hurricanes and fires are not the optimal way to maintain economic growth, however federal and insurance funding should boost economic activity throughout these impacted areas and beyond. The U.S. seasonally adjusted unemployment rate stands at 4.4%, with Arizona posting 5.0% statewide, and the Tucson metro area at 4.9%. Year-to-date 2017, Arizona ranks 13 out of 50 states for job growth. Over the same period, new home permits for Tucson are up 18.2% to 2,152, compared to 1,821 for the same period last year.
The Tucson retail market will continue to ride the wave of continued growth and expansion. Vacancy is expected to edge slightly lower and lease rates should continue to increase. Tucson remains a high priority market for regional capital looking for a home. Local capitalization rates typically land 100 basis points higher than many surrounding markets making Tucson a value proposition for investors. Tucson will remain a growth market with consistent year over year in migration.