Tucson’s Office Market: Pandemic Impacts, Medical Investment Trends, and the Rise of Mental Health Companies

The Tucson office market continues to see a rippling effect from the pandemic as employers try to entice employees back to the office. Although vacancy rates have remained at 10.1%, the negative net absorption rate of -62,372 square feet (sf) is a cause for concern as the available inventory of 2,914,919 sf remains on the market. The post-pandemic hybrid work schedule has led to a trend in larger office spaces being vacated or becoming available for sublease, which has been seen in larger submarkets since the pandemic.

To read the full report on Tucson’s office activity in Q1, click here.

Medical users are currently the driving force for office investment sales, as they often require larger and newly developed properties. Out-of-state medical care groups are attracted to Tucson due to the high demand for senior care. Some medical practices are expanding throughout the city. Additionally, some office owners are converting space to industrial uses, making investment sales in the industrial side noticeable. Despite rising interest rates, buyers are still showing interest in the office market.

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Most leases being sought range from 1,500 – 3,000 sf, which is typical in Tucson. Due to the demand for improving emotional well-being since the pandemic, established and start-up mental health groups are more active in the market. However, landlords are hesitant to accept companies that target their clientele population, making it to find long-term leases. Furthermore, many properties are not receiving the necessary updates needed as construction prices remain high. Although lease rates are holding steady, lease terms are beginning to trend upward.

The high-end and low-inventory Foothills submarket has experienced an increase in lease rates, but rental prices in Tucson remain consistent overall. The highest average asking rental rate is $28.24 per square foot (psf) in the Foothills submarket, while the lowest is $15.61 psf in East Tucson. Significant sales transactions include 4001 East Sunrise Drive, which sold for $9 million, 6502-6564 East Carondelet Drive for $1.4 million, and 1241-1245 North Wilmot for just shy of $1 million.

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