As with the national scene, quarter after quarter, the need remains for jobs to fuel a Tucson retail market rebound. The State of Arizona reported significant job gains for the local market in February, with Tucson’s unemployment improving to 6.7% from 7.3% in January. In the past year, 3,500 more jobs were added, largely in the education, leisure/hospitality and construction sectors.
RETAIL MARKET OVERVIEW
For years, Tucson’s retail vacancy has inched up and down with little overall change, and Q113 was no exception. Vacancy of 8.2% matched the previous quarter and movement varied within only one percentage point since Q309. While not enough to push down vacancy, net absorption for the quarter totaled 102,088 square feet (sf). With sustained positive absorption, upward rent pressure will occur in approximately twelve months. Asking rents did not move appreciably.
It is the best of times and the worst of times, with the lease transaction market in a state of contradiction. Well-located properties with low vacancy rates in desirable submarkets negotiated landlord-friendly deals. Less fortunate landlords with above-market vacancy rates and average locations remained at the mercy of aggressive tenant expectations. Developers loosened up with tenant improvement money based on a more favorable long-term economic outlook.
Active categories citywide include mattress, fitness and drug, with restaurants’ appetites largely restricted to the Campbell corridor and downtown submarkets. Mattress activity included a southeast BedMart, a Mattress Firm in Sahuarita, and an R&S Mattress in the Park Place trade area, with Phoenix-based R&S planning additional stores in 2013. America’s Best Contacts & Eyeglasses opened three local stores in Q113 to strong numbers, with the potential for additional locations. CVS obtained a key eastside corner, displacing El Mercado merchants to other market locations.
On the user and investment sale side, Q113 activity cooled, after a year-end flurry of closings. Excepting Krausz’s Rillito Crossing Marketplace purchase at $16.9 million, sales were dominated by smaller transactions, including bank-owned properties under $1.0 million. SBA activity gained traction. Low interest rates and small business optimism fueled many buyers to acquire buildings before the prices rise again. With properties healthy enough to recast the debt, refinance activity remained strong, thanks to available fixed rate money in the low 4.0% to high 5.0% range.
OUTLOOK
Musical chairs will continue for the near term as retailers move for lower rent or higher quality locations, most repositioning to regional trade areas with access to improved demographics.
Continued economic improvement has slowed the growth of the once hot discount retail category in the region and nationally, though Goodwill is carving a niche at the higher end.
