The unemployment rate for the Tucson metro area as of May 31st was 5.8%, 60 basis points (bps) lower than year end and 50 bps below the national rate. Decreased government spending impacted both Tucson’s market momentum and activity. Home prices and inventory flattened in the second quarter, while the inventory of Tucson residential listings increased.
Retail sales statewide were up 7.6% over the prior May, with strength in durable goods, increasing 8.0%. In addition to durable consumer goods, building material sales jumped significantly year-over-year, and overall retail sales outpaced employment growth.
Activity and market momentum increased for the Tucson office market, with transaction counts up nearly 45% over 2013. Following three quarters of positive absorption, vacancy improved slightly to 12.3%, with the most significant gains downtown. Medical activity dominated the suburban office landscape, as did user purchases on the investment side. While thin job growth remained the most significant hurdle to market equilibrium, Tucson unemployment outperformed the national rate, ending May at 5.8%.
Although Tucson’s market wide vacancy ticked up to 11.6%, positive momentum occurred in smaller spaces, with pressure building on lease rates in multi-tenant buildings. All ten of the largest leases signed in the quarter were over 10,000 sf for the first time since 2009. Inquiries to economic development offices increased toward the end of Q2, despite a natural pause in summer activity in the region. The sale market remained thin on the investment side, with user purchases most prevalent in Q2.
Market fundamentals continued to improve as supply tightened. Second quarter positive net absorption of 129,159 square feet (sf) represented the ninth consecutive quarter on a positive trajectory. At 6.5%, vacancy reached its lowest mark since Q4 2008, with upward pressure on asking rents, which increased 2.3% over the previous quarter. With pent up demand from investors, it is a great time to be a seller. Cap rates and interest rates are low, and appetite is high for retail investment property, both single tenant and multi-tenant.
The second quarter of 2014 saw historic progress in absorption and vacancy figures. Overall vacancy dropped 0.28% to a very encouraging 9.05% at the year’s midway point. Net rents for the Tucson market remained flat. On the sale side, Tucson has become a seller’s market and hotbed for investors. Properties taken to the market are gaining significantly more local and out of state investor interest.
Barbi Reuter, RPA oversees Cushman & Wakefield | PICOR’s operations, research, finance and marketing/social media activities and serves as Associate Broker. One of 12 company Principals, she is active in industry and community leadership, through such organizations as Commercial Real Estate Women (CREW), Greater Tucson Leadership, Arizona Town Hall, Women Presidents' Organization, and board work for the Tucson Girls Chorus and PICOR Charitable Foundation.
Sources: Arizona Daily Star, CoStar Group, Eller College, Tucson Assoc. of Realtors