Office Market Mojo: Tucson’s is Ticking Up

If our firm’s revenue and activity are indicative of the market, Tucson office market momentum has clearly increased, with annualized lease and sale transactions up 44.7% over 2013. Our team was busy helping clients position themselves to best avail themselves of opportunities, with regard to pricing and availability whether for lease or investment. With continued tepidness in job growth, creativity and resourcefulness ruled the day.

Survival of the Fittest

Inevitable winnowing in leaner years has yielded thinner ranks of professionals, not just in the brokerage arena, but also in the business environment which includes developers, architects, contractors and engineers. Many survivors are now thriving in a more concentrated environment and seeing strong business results in 2014.

By way of economic overview, the unemployment rate for the Tucson metro area ended May at 5.8%, 60 basis points (bps) lower than year end and 50 bps below the national rate. Home prices and inventory flattened in the second quarter, while Tucson listings increased.

Lease Metrics Ticked Up

On the third consecutive quarter of positive absorption, the market vacancy decreased slightly to 12.3%. The most meaningful and significant gains occurred downtown, where vacancy improved from 9.8% in the first quarter to 9.1% Q2 14. Lease rates remained steady, increasing our role in advising landlords and owners to understand the market and best position their property to attract tenants.

Outside of downtown, demand continued to be driven by medical activity, where change created opportunity. Banner Health announced plans to acquire the University of Arizona Health Network, which would result in a significant local capital and construction infusion, intent on strengthening the network.

Investment Activity Across the Board

After a high level of investment activity in Q1 14, user purchases dominated the sale landscape in Q2 14. The handful of investment sales the most recent quarter had a broad range of pricing, from $60 to nearly $287 per square foot (sf) with the median at $174 per sf. User sales, though higher in number, had a median sales price of $100 per sf.

Tucson Market Outlook

Downtown will continue to shine brightly for development and absorption, with the late July opening of the Tucson Modern Streetcar and the return of student residents. Ongoing changes in marketwide healthcare delivery will impact space utilization and decisions on consolidation and physician hiring, potentially concentrating medical practices on and around hospital campuses. Finally, with continued thin job growth, we encourage state and local municipalities to focus on incentive initiatives aimed at attracting employers.

Sources: CoStar Group, BLS, Eller College, Tucson Assoc. of Realtors


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