Year over year improvement in office market metrics continues, with a second consecutive quarter of overall market vacancy hovering at a seven-year low. Positive absorption of 31,000 square feet (SF) contributed to a 10.6% vacancy. Increased hiring by employers in engineering and financial services is expected to bring meaningful positive momentum for professional office absorption and eventual upward pressure on lease rates.
First quarter office construction of nearly 88,600 SF in four projects features significant expansion by the non-profit sector, including Casa De Los Niños (61,000 SF), Girl Scouts (11,700 SF) and the Jewish Federation (6,000 SF).
While overall sales volume at $15 million was somewhat lower than recent quarters, value pricing created impetus for activity. With no buildings under construction and optimism on the rise, we forecast that pent-up demand for quality space may spur development of new medical and professional office product in the quarters ahead.
As the Tucson market continues to experience increased leasing demand and absorption of vacancies, we anticipate some upward pressure on lease rates over the next few cycles. The long-term outlook bodes well for office investment, especially in select niche markets such as well-located, class A and B office space.
As quality supply is absorbed and demand pushes rates higher, demand for newer, high-quality space should justify demolition of older, obsolescent space, allowing for new construction. Ultimately, the positive economic momentum in the Tucson region will result in increased consumer and investor confidence. With a thriving economy and demand for space, Tucson’s office inventory will transform to meet contemporary office demand.
Arizona’s economy closely follows the national trend, calling for continued growth through 2017. Arizona expects continued gains in jobs, residents, and income at a rate exceeding the national average. Recent announcements by Caterpillar, Vector Industries, Raytheon, Comcast and Ascensus are strong indicators of this trend. Tucson is expected to add over 10,000 jobs in the period from Q2 2016 through Q2 2017. While focusing on past and current performance, businesses in the region will maintain a watchful eye toward broader factors such as regulatory policy, immigration, trade, value of the dollar, and potential federal tax reform. As a border state, positive trade relations with Mexico remain crucial to our economy. Finally, the impact of the new minimum wage ordinances recently passed in Arizona, among other states, will reveal a clearer picture of what to expect in the coming months.