Tucson retail vacancy improved dramatically in the first quarter of 2018, dropping from 6.0% to 5.6%. This may have led to an increase in average asking lease rates compared to last quarter. Rates averaged $15.05 per square foot (psf) versus $14.87 psf at year end 2017.
Demand has prompted an additional 136,028 square feet (sf) of retail space under construction for a total of 231,984 sf for the first quarter of 2018.
Market Overview
Downtown Tucson will continue to grab attention with several projects scheduled to be completed or to begin construction in the coming months. Prominent retail developments under construction include West End Station on Congress, City Park between Scott and Stone, several building renovations and new tenants on Congress, and The Boxyard on 4th Avenue.
The first high-rise building touching 4th Avenue, being called Union on 6th, is planned to add 250 residential units, a ground level of retail and much needed underground parking. The same concept is being planned for the original O’Malley’s Lumber and Glass property at the underpass where 4th Avenue meets Downtown Tucson. The Speedway + Campbell Gateway Project is planned to add 100,000 sf of residential space with 40,000 sf of retail space and a 30,000-sf grocery store along with offices and underground parking. The goal of these large mixed-use projects include strengthening the community by providing additional and superior Live-Work-Play environments.
Economy
Arizona posted healthy job growth as predicted when the Bureau of Labor Statistics revised data indicating that Arizona employment actually grew +2.4% during 2017 versus a previously reported +1.7%. Tucson job growth for the year was also revised, up to 1.5% and early in first quarter 2018, employment has held steady.
The national trend of tight labor markets impacting pricing and space demands, set the tone for Tucson to follow suit. In the short term, this may be good news as rental rates rise, but in the long-term threatens growth if labor markets stay tight, deliveries stagnate and the federal funds rate continues to rise.
In February the average sales price of Tucson homes rose 3.3% to $249,095, while new single family housing permits were up 13.7% year-over-year. January retail sales in the Tucson MSA were up 6.9% year-over-year (YOY).
Outlook
The strong first quarter absorption rate clearly indicates the appetite for Tucson retail space in the commercial market. This momentum is expected to continue as the regional economy continues to improve. New leadership at the University of Arizona under Dr. Bobby Robbins has been effective at implementing strategies to further integrate this major research engine into the local business and technology communities. Recent gains in tech employment and gains in regional employment clearly show the success of this strategy.
On the investment side, the flood of out-of-state capital continues to move capitalization rates down and investment property values up. Until neighboring inflated markets correct, this trend is expected to continue.
