Positive momentum continued its five-year trend in 2018 in the Tucson industrial market, with vacancy improving to 5.7%, cut in half from its highest point in recent years. At year end, vacancy was lowest in the city center at 1.5% and highest in the Southwest/Airport area at 12.8%. Net absorption was 50.4% stronger than in 2017, and thanks to Amazon’s two projects, space under construction has quadrupled year over year. Significantly, Amazon is entering the market with an 850,000 square foot (sf) distribution center under construction in the southeast sector and a new 50,000 sf service center in the southwest.
While down, the decrease in average asking rents is likely attributable to higher absorption of more functional space, as actual effective rents are seeing pressure to rise. With inventory tight, one developer broke ground on a new 157,000 sf building with intermediate bay sizes to fill the market void. Others began positioning with land acquisitions pending further rent inflation to support new construction.
Cap rates improved for sellers as demand for quality investment options gave rise to highly-competitive buyer activity. At $150.3 million, 2018 sales volume was at its peak since 2007 and more than doubled each of the previous nine years.
Economy
The Tucson economy continued to grow robustly in 2018. Total non-farm employment is up 3.1% over the year, while the manufacturing sector led with a massive 7.9% gain. Aggregate retail sales posted a strong 4.5% gain as consumer sentiment remained buoyant despite the stock market moving into bear territory and the possibility of an inverted yield curve.
Tucson personal median income rose 5.4% over the year and population grew by 1.0%. At 2.2%, inflation in Arizona matches that of the nation. A recession resulting from an inverted yield curve occurs 18-24 months after the point of inversion. Accordingly, 2020 would be the earliest recessionary onset, and any economic pullback is expected to be minor.
To boost development and investment, 28 census tracts in Pima County were approved as Opportunity Zones, enabled by the Tax Cuts and Job Act of 2017. Coordination between the city and county allowed the region to maximize both the chance of approval and the greatest economic impact.
Outlook
Rents for spaces under 5,000 sf will rise 10-15% in 2019. Expect growing demand among service companies and other construction-related trades. Even at a historically strong occupancy rate, Tucson’s market has room to improve, as several high profile, larger buildings over 200,000 sf are ripe to be absorbed, essentially bringing Tucson to full occupancy.
With vacancy across the region expected to drop below 5.0% in 2019, market dynamics will shift, and new development will occur as rents justify new construction.
Key local employers in mining and aerospace/defense sectors like Raytheon have quietly expanded their employment bases in Tucson, and we have seen a rise in prospects considering bringing jobs to the region.
Photo credit: Alan Levine, Color Corner
