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Industrial Market Midyear Report 2016

Posted on Jun | 2016

Chuck Blacher Industrial Real Estate Professionalby Chuck Blacker

Industrial Market Midyear Report 2016

Tucson’s Industrial vacancy rate increased from 9.3 percent at the end of 2015 to 9.4 percent in mid June indicating the continued weakness in this market. There seem to be some positive signs in Tucson’s general economic condition for the past six months with an optimistic outlook moving forward for the second half of 2016.

The average sale price for an Industrial building increased from $41.00 per square foot at the end of 2015 to $46.00 per square foot in June of this year.

Currently, there are 71 Industrial buildings for sale 1,000 square feet or larger with 41 having been sold since the beginning of this year.  This trend leaves us with about a one-year supply which is a vast improvement over the last 6 to 7 years.

Several of the larger lease signings since the first of the year were:  1) Sun Valley Supply, 22,398 square feet at Wetmore and Grant, a major homebuilder supply company headquartered out of Phoenix catering to the homebuilding trade; 2) 60,000 square feet by Autobahn Indoor Speedway at 300 S. Tool Avenue;  3) 20,000 square feet to Community Bridges at 250 S. Tool Avenue;  4) 33,797 square feet to Hilliard Creations at 700 E. Fair Street; and 5) 12,800 square feet to a moving and storage company at 5455 S. Nogales Highway.

Lease rates have declined slightly from the beginning of the year from $6.79 per square foot to $6.77 per square foot, a meaningless amount, but nevertheless confirming that it’s still a tenant’s market until rents head in the opposite direction.

The one bright spot is the housing market which will have a positive effect on the Industrial market for the next several years. When the market went south in 2008, many suppliers of product for the homebuilding trade retrenched or pulled out of Tucson.  Tucson’s housing sales have increased 10 percent over last year and with the announced move of Caterpillar to Tucson starting this summer and continuing through 2008 relocating it’s mining equipment business from Peoria and Decatur, Illinois and South Milwaukee to Tucson, these additional home sales will fuel this market.

Caterpillar purchased Bucyrus International in Milwaukee in 2011, the builder of large steam shovels, some the size of two garages.  These shovels helped build the Panama Canal back when. The new complex will be built just west of the freeway and accommodate over 600 higher-paying jobs (averaging $90,000/year) consisting of Surface Mining and Technology Divisions with employees in executive  management, engineering and product development.  This influx of higher-wage earners over the next two years will stimulate the home building trade and all the contractors, roofers, concrete contractors, plumbers, electricians, etc. that cater to this trade that have taken up space in the past will do so again in the warehouses and contractor yards around Tucson

There are currently no new buildings under construction. The largest occupancy over the past six months is the new 800,000 square-foot warehouse for Home Goods in the airport area.

Net absorption of Industrial space was a negative 108,038 square feet as compared to a positive 2,541 square feet in the fourth quarter of 2015 and a positive 69,046 square feet in the second quarter of 2015.

Along with Comcast’s new call center employing around 1,100 people in American Furnishings old retail space on Oracle Road, Comcast and Caterpillar are basically office users. What runoff to the Industrial market will develop from suppliers to these companies remains to be seen, but definitely a boost to Tucson’s overall economy, which finally should break out of its doldrums. The past several years have seen positive vitality in the first half of the year only to drop off in the second half of the year.

We believe we are now finally in an upward trend for the balance of 2016 which should reduce vacancy rates, increase rental rates moderately and increase the depressed values of industrial properties.