Tucson’s Industrial real estate is greatly influenced by the residential homebuilding market. Thus, warehouses and contractor yards normally occupied by the building trades will struggle to find tenants until home building locally improves – a challenge, to say the least, for several reasons:
1. The past brutal winter in the Midwest and East Coast contributed to a slowdown in job growth, home construction and sales. The U.S. economy contracted one percent in the first quarter, the first decline since 2011, but this is expected to improve in the second quarter to an annualized rate of around four percent. If you haven’t sold your home or are in a slow market, you probably won’t commit to purchase a new one.
2. The great American dream of owning a home is not in vogue. Younger Americans are losing faith in home ownership as the key to prosperity. Over 64 percent believe they are less likely to build wealth by buying a home than they were 20-30 years ago. That has made renting more appealing than buying—the housing bust with its explosion of foreclosures changed all that. Job security in an Obamacare economy is fragile. Current thinking with owning a home is you might lose your job or have to move; thus, renting is more flexible. Some first-time home buyers value their automobile, a smart phone or Netflix over a mortgage.
3. Automation comes about from the digital revolution, since computers and robotic machines can do many of the jobs performed by humans. Even though the economy added 217,000 new jobs in May and the national unemployment rate is back to 6.3 percent which peaked in 2008, (although that number is more in line with 12 to 15 percent, because it doesn’t take into account those who have quit looking for work), middle-class jobs are declining. Low-skilled jobs are replacing the middle-class jobs that were lost and some higher-skilled jobs are increasing. Manufacturing jobs have been outsourced to Asia and wherever labor rates are lowest. Trade jobs such as roofers, electricians and framers, used in home building are the middle-class jobs we need, but until the housing market improves, job growth will be limited. The national yearly middle-class salary range is $32,000. Tucson is approximately $27,500, below the national averages of $30,000 to $50,000. Just three weeks ago in the Arizona Daily Star, it was announced that the University of Arizona Health Network laid off 23 staffers in its Record Keeping Department because a new electronic record- keeping system eliminated the need for their jobs. Bodies take up space and occupied space is what drives the Industrial real estate market. More jobs bring more demand for space either leased or purchased.
Net absorption for the total Tucson Industrial Market was a negative 45,000 square feet compared to positive absorption of 201,751 square feet in the fourth quarter of 2013. Strictly warehouse space fared a little better with positive absorption of 25,921 square feet compared to positive absorption of 160,841 square feet in the fourth quarter of 2013.
The industrial vacancy rate in Tucson is approximately 11.3 percent, up from 11.1 percent at the beginning of the year. Currently, there are 85 industrial zoned buildings for sale 5,000 square feet or larger. Wow! The largest at 300,000 square feet is the Lisa Frank building in the airport area.
Eight building have sold from 1/1/2014 to date, the largest being 52,592 square feet in several buildings at 3650 South Broadmont. The existing tenant purchased the building. The purchase price was $28.50 per square foot or $1,500,000. The same building sold for $3,000,000 in 1996.
The largest lease signings year-to-date were: 1) 52,346 square feet signed by Farnswork Wholesale at 6701 S. Midvale Park Road in the south market; 2) 27,919 square feet signed by Pacific Insulation at 3759 E. 43rd Sreet in the central market; and 3) 26,501 square feet signed by B/E Aerospace at 1671 S. Research Loop. The average rental rates available for industrial space are $6.28 per square foot. Warehouse rental rates are up slightly to $5.77 per square foot from $5.74 at the end of 2013. During the first half of this year, only one building was completed in the Tucson market area totaling 14,214 square feet. No buildings were completed in the fourth quarter of 2013. Currently there are no buildings under construction.
Aside from the fact that we need Davis Monthan to stay, we also need jobs here to get things moving in a positive direction, whether it’s the overflow from a booming uptick in the national economy or the relocation to Tucson of a large national company with large employment requirements; otherwise, our market will remain stagnant with little or no growth as we have seen since the recession of 2007. I don’t think the over 55 age group moving to the sunbelt is the ticket. A combination of positive events will have to take place.
“The Industrial Market is somewhat like a grocery store. We know what a good market tastes like, except we don’t have to turn off the power for everything to go bad.”