Tucson Office Market: In Flux or Flexing?

In Q2, Tucson’s post-pandemic office market began to re-center itself, as vaccinations became more widespread, and employers planned their return to office strategies. Vacancy rose to 9.5%, with an expectation it will approach 10.0% by year-end before stabilizing. Activity was strongest in the healthcare-related fields, with hospice, home health care, counseling and therapy uses most prevalent.Demand for Tucson office investment property has continued apace, with limited supply given the challenges of finding investment property to trade into.

Construction includes the University of Arizona’s 118,000 sf Refinery project at the Bridges, which it will partially occupy. Also underway is Northwest Medical Center 45,000 sf medical office building and 52-bed regional hospital campus on Houghton Road that could spark nearby medical development activity.

With widespread vaccination availability, while other commercial sectors have rebounded more quickly, the office market remains in a state of flux. Office-using employers are assessing their short and long-term space needs and testing models. De-densification expands some footprints, while hybrid and flex work schedules call for rethinking the traditional office layout.

Lease rates were stable, despite landlords becoming more aggressive on concessions to attract and retain those tenants up for renewal. 

Construction costs skyrocketed throughout the pandemic, largely due to demand increases and supply chain challenges, but certain goods are beginning to normalize.

Cap rates for top-quality NNN-leased office and medical investment property ranged from 6.25% to 7.0%. As we look ahead, investors are carefully watching tax proposals that would impact capital gains treatment and like-kind exchanges.

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