Commercial Real Estate Investment Market Overview

Commercial Real Estate Investment Market Overview

Commercial Real Estate Investment Market Overview presented by Terry Lavery, CCIM, CPM, GRI

INVESTMENT OVERVIEW

January 29, 2015

Since the early 1990’s, Tucson Realty & Trust Co. Commercial Real Estate forecasts have produced an overview of the Tucson Commercial Real Estate Market. This overview has highlighted major transactions in the marketplace, short-term risk and returns, market velocity, institutional investment activity, and significant tax changes. One key topic that needs to be discussed is “Why invest in Tucson versus the other cities in the United States?”.

In the fourth quarter of 2014, a large panel of national buyers with a proven record of performance in large asset acquisition discussed this topic in Los Angeles.  This panel discussion focused on investment and opportunity in secondary and tertiary markets.  Of the 300 market- places in the U.S. deemed to be primary, there were only six which were considered due to safety, return, and uniquely diversified for long-term institutional ownership. These six were New York, Chicago, Boston, Washington DC, Miami, and Los Angeles. The second tier consisted of 294 remaining metro areas of which the next six were selected. These were Dallas, Atlanta, San Francisco, Seattle, Houston and the hotly contested final chosen area. The last mentioned finalists chosen include Denver, Phoenix, Austin, Charlotte, and Northern New Jersey. Unique opportunities were growth cities such as Nashville. Quandary cities such as Detroit and Cleveland were excluded due to population migration or bankruptcy.  Nationally, Tucson is on map, but under the radar.

Tucson is a tertiary market for national real estate investment.   Our apartments for national investors must be 200 units or greater and our office leases longer up to 7 – 10 years.  Our industrial product must be cutting edge with growing job creators with credit quality.  The age of our available inventory must be less than 10 years old. Most importantly, our local government must be pro-business for users of commercial space.  Our region has great amenities, but generally lacks safety for long-term investment. Last, we as part of this State of Arizona must cheer any out-of-state employer moving to Arizona as it legitimizes the state as a place to invest.  The more velocity and volume we generate, the better our economy.  As a city, Tucson must be prepared to facilitate and encourage new employment opportunities.

The current national market is poised for growth. Consumers are spending, GDP is stronger, and growth in fixed investment is growing. Dropping oil prices have benefitted all consumers and business operations. Low inflation and interest rates have encouraged economic development.  Our U.S. economy is slowly coming back, although Tucson is lagging well behind.  It’s all about jobs.

Investment opportunities in Tucson remain mainly with Class A large investments or locations, such as the 2014 sales of El Con, the MDA Building and 4400 E. Broadway.  This may continue in 2015 as cap rates are at their best from a seller’s perspective and interest rates for purchasing at bottom levels.  Together these bring excellent conditions to sell.  Expect more trophy sales as sellers harvest and buyers take advantage of lower rates.

In addition, you will continue to see small apartment transactions continue along with some residential land to builders to replenish low lot stock.

In conclusion, our Tucson marketplace is under performing as a national real estate investment opportunity with sales mainly attributed to trophy properties. The boom bust economy in the past decade has shocked investors. Less hurdles and incentives to enter southern Arizona must be a priority to compete for job growth compared to other metro areas.

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