Arizona job growth outpaced the national rate as the state continued to recover. Statewide improvement in job gains was primarily found in the Phoenix metropolitan area, with only 1,300 new jobs in the Tucson region since July 2012. According to Forbes magazine and Moody’s Analytics, Arizona ranks No. 1 nationally for projected job growth over the next five years, forecasted to increase 3.0% with an annual economic growth of 4.6%. The housing recovery statewide positively impacted construction jobs in both Phoenix and Tucson, but permits remained low, relative to historic norms. Conventional lending is recovering and inventory remained below the balance point at 3.5 months while finished lot supply is scarce.
TUCSON INDUSTRIAL MARKET CONTINUES IMPROVEMENT
Occupancy gains of 213,087 square feet (sf) marked the fourth consecutive quarter of positive absorption for the Tucson industrial market. Improved demand decreased the vacancy 0.6% to 10.8%, a level not achieved since Q2 09. The Northwest industrial submarket finished third quarter with the lowest vacancy in Tucson at 7.3%.
Some seasonal slowing in activity occurred in August, with mining-related uses the most positive highlight. A continued absence of large users, job creators and enhancers, remained the fundamental underlying market concern.
Average asking rates for Tucson industrial space remained soft by historical standards, but increased 6.0% over the previous quarter. Actual transaction rates did not increase, but isolated tests of rent increases, particularly in smaller incubator projects, were successful and may indicate opportunity for rent movement after years of decline and stagnation.
BUYERS SENSE THE MARKET BOTTOM
Users and investors sensed the market floor was reached, signaling a timely entry point for purchase. Three investment sales of significance occurred in the third quarter at aggressive pricing: HSL’s purchase of the 253,000-sf former Texas Instruments plant near the Tucson Airport; Castlerock Investments’ 41,000 sf purchase of a midtown business park; Larsen Baker’s acquisition of Madera Business Park, a 35,200-sf property in South Tucson.
Industrial user sales were still dominated by small building sales well below replacement cost with a high percentage of REO sales.
TUCSON MARKET OUTLOOK
The statewide economic forecast calls for modest growth for the balance of the year, accelerating in 2014 and 2015 and outpacing the nation’s rate of growth. Personal income growth fueled by predicted job gains is also expected to accelerate over the same period, having a positive impact on retail sales.
Locally, a troubling trend of companies leaving the market persists, signaling a fragile environment for job growth. Tucson’s reliance on public employers remains a limiting factor. Expect small business to drive incremental growth while the region’s reputation as a hub for innovation and entrepreneurship takes hold.