A Midsummer Night’s Dream for the Tucson Industrial Market

Pinch us… Tucson’s industrial vacancy is nearing single digits and ended the year’s midway point 1.6 percentage points healthier than a year earlier. Read more in our Q2 2015 Tucson Industrial MarketBeat.


Mid-year 2015 marked a time of continued steady progress for the Tucson industrial market. The Arizona/Sonora border region also posted as much activity as reported in recent quarters, spurred by demand and buzz in Mexico for quality manufacturing options nearer to the region. Home prices increased in June, thanks to inventory at a 21-month low coupled with steady consumer demand and favorable interest rates. U. S. consumer confidence was up significantly and personal income statewide slightly outpaced the rate of gain nationally.


Market overall vacancy flirted with single digits and at 10.0% was a full 1.6 percentage points healthier than the previous year. Office service/ incubator space posted the lowest vacancy at 8.7%, while the highest vacancy was experienced by warehouse properties, coming in at 10.6%, though unchanged over the previous quarter. High tech space recorded the highest absorption in the second quarter, improving from 11.2% in Q1 to 9.8% in Q2. Rental rates remained soft, with only nominal year-over-year headway. Six of the quarter’s top ten leases, including the three largest, were renewals, demonstrating landlords’ inclination, if not imperative, to retain tenants.


While few investment sales closed in Q2, significant interest heated up the Tucson industrial investment market, thanks to an influx of outside money, largely from California, raising the bar and competing for product. Due to tighter markets with lower cap rates, more investor activity has spilled over into Tucson. This includes private funds and 1031 money.
User sales reported slowing momentum, though buildings under 5,000 square feet (sf) with yard space sold quickly and close to asking prices.


Thanks to the 800,000-sf HomeGoods project, space under construction exceeded the one million sf mark for the first time since Target’s fulfillment center was completed in 2008. That being said, many of Tucson’s significant economic drivers are simultaneously experiencing a perfect storm of financial headwinds. These include DMAFB, the University of Arizona, Raytheon, and the mining and homebuilding industries. Housing indicators are moving in the right direction, and we expect homebuilding to return in 2016. With multiple large requirements in the marketplace competing with other cities and states, expanding and retaining our local employers will be key, and we predict some large blocks of space will be taken down in the second half of 2015.

Sources: BLS, CoStar, Eller EBRC, Tucson Assoc. of Realtors
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