Thanks to healthcare demand, the Tucson office market has a heartbeat. By increasing the number of insured citizens, coupled with a growing aging population, the Affordable Care Act is anticipated to be a key demand driver for Tucson medical space. The activity level of behavioral health tenants in the Tucson office market has particularly blossomed. Overall, post-recession job recovery locally has lagged the nation and state as a whole, leaving job creation the most pressing demand driver.
A market in search of demand
Lacking significant drivers and scant job growth, the Tucson office lease market ended the first quarter at 12.4% vacancy, up slightly from year-end 2013 and matching its highest mark in this real estate cycle.
Activity resembled a game of musical chairs, with renewals and continued downsizings. The trend toward more efficient use of space took its toll on demand for yet another quarter. Tenants traded into higher-quality space, albeit typically into smaller quarters, thanks to technology and improved productivity per worker. Rents continued to soften in response to more limited demand, and available options for small to mid-size users in high-quality buildings remained abundant.
Investment activity bumps higher
More positively, 11 office investment sales closed Q1 13 for a total of over $37 million, averaging $121 per square foot (psf). This marked return to purchases for income stream reflected the availability of investor capital for purchase of quality, well-located property, with values scaled based on occupancy and revenue. The two most significant investor buys were a REIT’s purchase of a single-tenant airport-area facility occupied by Raytheon and the local investor purchase of the former Muscular Dystrophy Headquarters, which will be marketed to multiple corporate users.
Seven small user transactions also occurred, with an average sale price of $102 psf.
Capital was available and affordable, though appraisals below agreed sale prices in multiple transactions required additional equity.
Outlook
While the date remains uncertain, the Tucson market will inevitably reach bottom and begin a move toward stronger fundamentals. Energy, residential momentum, multi-use development activity and positive absorption in the city center bode well as sparks for broader success for the Tucson market.
Photo credit: BigStockPhoto; Data source: CoStar Group
