In Q2 2021, Tucson industrial and flex space of all types remained the darling during tumultuous pandemic times and for the foreseeable future. E-commerce and expanded consumer buying power drove logistics and fulfillment demand and a 5.5% vacancy rate in the market.
Supply and Demand
Construction and home building have driven supplier and contractor activity with 256,000 square feet of positive absorption during the second quarter.
Overall market vacancy has remained at a steady level for three consecutive quarters. Limited inventory has been the impetus for speculative and build-to-suit construction by Harsch, Daybreak, and other developers, with opportunity in the speculative industrial market in Tucson not seen in recent times.
Improved business park sales are at a high point not previously seen, both for small lots for end-users and larger parcels or assemblages for major employers and warehousing operations. A feverish investment climate with inbound money from out-of-state seeking yield has pushed sale prices up and cap rates down, with some sales in the 6% range and pricing up 10%-15% over the previous year.
Sales volume for the first half of 2021 more than doubled that of the same period in 2020, despite the limited inventory. Given the tight market, sellers are challenged to place their proceeds. User buildings are moving as quickly as they can be listed for sale, close to or at asking prices.
With quality leasable inventory depleting, many landlords are positioned to recast leases and drive increased value. Inflationary pressures are on the horizon, thus structuring leases properly is a key factor for savvy landlords.
Tucson and Arizona’s Economy
In Q2 2021, the Tucson market recorded nonfarm employment of 380,400 jobs. The unemployment rate improved dramatically from 8.3% in May 2020 to 6.8%, as the effects of the pandemic began to normalize. Median household income decreased by 11.9% compared to Q2 2020. Arizona’s April retail sales grew 45.5% year-over-year with housing permits up a full 71.0%. Single family home sales volume was up 12.0% year-over-year through June and the median sales price increased 25.1% for the same period.