On May 1, Reis published data and reports for both the month of March and for the first quarter of 2013.* The following is an update on the Tucson office market and the Phoenix office market and trends to watch.
Asking Rates have Leveled Off in Tucson
Entering into 2013, the Tucson office market is finally seeing some stabilization in terms of asking rent. After a startling decline for the full-year 2012 of 0.6% and a Q4-12 drop of 0.3%, asking rents have leveled off. At the end of Q1-13 the mean asking rent of $21. 38 remained unchanged from the end of 2012. Vacancy, however, continues to be somewhat of a concern for Tucson. Vacancy, however, continues to be somewhat of a concern for Tucson, increasing 30 bps during the first quarter to 15.8%. With no new construction coming online during the first quarter, Tucson is struggling to absorb existing inventory. Given that asking rent has remained flat, this uptick in the vacancy rate is responsible for the decrease in gross revenue per square foot by 0.4% from Q4-12 (compared to a 0.8% increase nationwide).
Vacancy Still the Big Story in Phoenix
While Phoenix did not experience the same rate of asking rent growth during the first quarter as was exhibited throughout 2012 (0.7% for the year and 0.4% for Q4 2012), rent growth remained positive during Q1 2013 ending the quarter at $22.40, a growth rate of 0.1%. Vacancy is still the big story in Phoenix. With a vacancy rate of 26.0% for Q1 2013, compared to 17.0% nationwide, Phoenix is ranked 79 out of the 82 total metros nationwide covered by Reis. Total net absorption in Phoenix in Q1 2013 was negative 144,000 square feet, erasing the 122,000 square feet absorbed in Q4 2012. Job growth continues to be key to future vacancy declines in Phoenix. It remains to be seen whether sequestration will hinder the tepid progress that has been made so far in that regard.
The Road Ahead Shows Improved Rent Growth
Looking ahead, fundamentals will continue to improve in both Tucson and Phoenix. Asking rent is expected to increase in the two metros by of 0.9% and 1.9%, respectively, in 2013. The recovery effort in both Tucson and Phoenix should, however, lag national rent growth, which is expected to increase 2.5% by the end of this year.
Credit: CRE Data & Video provided by Reis, Inc., photo credit Sirlin/Shutterstock.
Editor’s Note: Market statistics vary from those quoted in C & W | PICOR’s quarterly reports, due to differing data sources and data sets. For details on Reis, Inc.’s survey criteria, please visit the Reis, Inc. FAQ page.
*ReisReports now offers monthly reporting, giving subscribers access to both sets of information.
From an economic standpoint, the State of Arizona reported significant job gains for the local market in February, with Tucson’s unemployment rate 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.
BACK-TO-BACK QUARTERS OF STRONG ACTIVITY
For the first time in two full years, absorption was positive for consecutive quarters in the Tucson industrial market, signaling a trend toward firming fundamentals. First quarter 2013 absorption of 166,778 square feet (sf) was consistent with absorption in more balanced times. Contractions gave way to more business relocations and some expansions. Lease activity has been fairly broad based, with the largest transactions in the 8,000-20,000-sf range and no large, dominant deals among the quarter’s transactions. Small incubator-type space started the quarter strong and tapered into March.
Call centers, the mining sector and construction supply have been the most promising user groups, with residential suppliers beginning to fuel business park occupancy.
Except in the very competitive 15,000 to 20,000-sf space range, availabilities began to narrow, creating a sense of urgency for firms which may have been biding time before a move.
CONTINUED PRICING PRESSURE IN THE SALE MARKET
Prices remained under pressure, in part because underlying fundamentals began improving very slowly. In addition, lender-owned inventory continued to enter the market, receiving significant interest from users and investors alike.
Aging building stock left behind, in both lower class and less well-located properties, may impact competitiveness for inbound requirements, and with no demand for new buildings, industrial land activity remains idle.
While the market remains tipped in favor of the tenant, it is trending toward equilibrium. If current activity continues apace, we anticipate long-awaited upward pressure on rents in another 12 to 18 months. Pressure on values may lag this time frame, as rents must firm first.
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.
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.
As with the national scene, quarter after quarter, we have cited the need for jobs to fuel a Tucson office 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.
BACK-TO-BACK QUARTERS OF STRONG ACTIVITY
Following on a strong finish to 2012, lease activity in the first quarter continued at a more active pace. Rents began to firm, with asking rates virtually unchanged over the prior quarter. For better properties, concessions tightened, while secondary and tertiary properties still struggled for attention at lower rates and deeper concessions.
Slight positive absorption of 37,829 square feet (sf) occurred, ticking the overall vacancy rate down to 11.9% – 10.4% downtown, and 12.3% in the suburban Tucson market. This followed Q4 2012 positive absorption of 82,506 sf.
The ‘flight to quality’ afforded by years of rent compression has left a significant inventory of space challenged by dated improvements and deferred maintenance.
Medical space remained the demand leader as the trend toward Accountable Care Organizations (ACOs) materialized in legitimate market demand. Tucson Medical Center’s state-of-the-art West Pavilion opens in May, freeing some 50,000 (sf) of medical office space on the TMC campus for new medical-related occupancy. This large amount of well-located space will put pressure on properties challenged by access to hospital campuses.
INVESTMENT PRODUCT CONTINUES TO MOVE
High year-end investment sales momentum carried forward into 2013’s first quarter. The sale of 333 E. Wetmore (a class A, 142,000-sf multi-tenant property) in late March represented the largest stabilized investment sale in the Tucson market post-recession. Online auction has become a popular vehicle for disposition of foreclosed assets, most recently Wilmot Professional to a local investor at below $50 psf.
With tenant appetite for Foothills space and scarce supply, we still anticipate a user to trigger construction on a planned development. We also forecast outright sale of closed Tucson Unified School District (TUSD) school sites.
Downtown revitalization continued apace with two private projects under construction, Plaza Centro and 1 East Broadway, complemented by both planned and initiated projects including student housing, traditional apartments, retail, restaurant, and hotels. Development of the Tucson Modern Streetcar project will continue to keep all eyes on properties along its route.
Photo credit: chelle
Our team members have been active and visible in support of the market and industry. Read on for recent and upcoming events featuring Cushman & Wakefield | PICOR’s professionals.
Mike Hammond, President and CEO, was recently featured on Dean Greenberg’s Money Matters. Here’s an audio clip from his guest spot last month, where Mike talks about the Tucson commercial real estate market’s return to health.
Denisse Angulo, Regional Marketing Specialist for C&W | PICOR, joins a panel speaking at Tucson Commercial Real Estate Women (CREW) on April 18th on Doing a Deal in Mexico – the pitfalls and opportunities of cross border real estate. It’s an open luncheon program, with online registrations open through April 15th.Rob Tomlinson, Retail Specialist, moderates a panel for members of the American Planning Association on April 18th forecasting the downtown Tucson real estate scene in five years.
Bob Kaplan, Principal and Investment Specialist, speaks to the Metropolitan Pima Alliance on April 19th, as a panelist providing a Student Housing Update. Visit MPA’s website for more details and registration.
Rob Glaser and Mike Hammond are moderating a Mentorship class for the Urban Land Institute (ULI) Arizona, in which one of Arizona’s most significant owners/investors of business park property will be speaking to young professionals about that segment of the industry.
Barbi Reuter, Principal/Marketing & Operations, recently joined a panel with CREW Network to promote careers in commercial real estate. In this CareerZone video series, she and representatives from CBRE, Colliers International, Cushman & Wakefield and Windstar Partners talk about their entry into the commercial real estate brokerage business and strategies for success. She will also present two sessions on Twitter for commercial real estate professionals at ICSC RECon in Las Vegas next month.
Guest post from Tucson Regional Economic Opportunities (TREO), on the launch of a new economic development strategy focused on the strengths of southern Arizona diagnostics.
The realm of bioscience is really big. It’s kind of like saying, “I’m really good at sports.” The natural question one might ask is, “What sport do you excel in? Baseball? Football? Badminton?” The same question can be asked of bioscience. Does your community excel in biochemistry? Food science? Animal biotechnology? With a broad and expansive industry like bioscience, no one community can successfully deliver all aspects that industry encapsulates much like no one person can be the best in every sport.
In 2006, the TREO Blueprint identified bioscience as an industry cluster TREO and the community should focus on based on the strengths and assets of the infrastructure, research and talent that stems from the University of Arizona. For seven years that has served us well as companies like Roche, Sanofi and HTG Molecular have entered the market. However, there is a common thread amongst those companies: diagnostics. TREO recently published a report titled, “A Comprehensive Focus on Diagnostics Business Growth in Southern Arizona.” The report outlines why our region needs to specifically focus on diagnostics and what steps we need to take in order to attract companies and talent to become an epicenter for the diagnostics field.
TREO’s analysis of the economic opportunities for the region has identified diagnostics as a focus area for recruitment and retention of bioscience-related companies.
TREO commissioned Dr. Raymond Woosley, former Vice President for Health Sciences at the University of Arizona and Dean of the College of Medicine, and founding President of Critical Path Institute (C-Path), to obtain the guidance and consensus of the region’s stakeholders and identify specific steps that can advance the region’s economic strengths in biomedical sciences.
As part of the research and fact-finding conducted for this strategy, over 80 community thought leaders were consulted and numerous meetings of stakeholders were held. The broad expertise of this stakeholder group was critical for developing sound, specific strategies.
Download the complete report here
Michael Guymon, Vice President of Regional Development for Tucson Regional Economic Opportunities, is responsible for planning, developing and implementing the business development strategies of TREO to attract, retain and expand jobs and capital investment for the region. He provides direct client and project management services with site selection/expansion projects.