Tucson Real Estate Investment Overview
By Terry Lavery Investment Specialist
The Tucson Real Estate Investment market for mid-year 2015 has produced mixed results. Few sectors of the commercial real estate market have produced true leadership. While other markets across the nation are booming (Chicago, Baltimore and San Francisco) with major CBD projects, Tucson lags eighteen months behind Phoenix and other major markets as to any clear confirmed trends for investors to risk any money as compared to other investment alternatives.
The one bright spot on the investment horizon is the multi-family marketplace. Drilling down deeper into the sector, we see a substantial supply increase in high-quality student housing in and around the University of Arizona with 4,000 new units added to the market over the past 4 years. National student housing investors who correctly anticipated the product type for incoming college students are enjoying high occupancy and strong returns. In addition, with the new modern street car and an entertainment driven CBD, more housing is being created for students and double-income families who are seeking temporary high-rise living with “walk ability”. In addition, new zero lot line homes near the intersections of Kolb and River, and west to River and La Cholla have attracted home sellers looking to downsize and new transplants to Tucson into new, safe, convenient locations available to medical, shopping, and upscale neighborhoods.
Rental rates start at around $1,200.00 per month, which sounds steep to local Tucsonans, but a bargain compared to other major markets. Old, outdated and used existing inventory cannot compare with new constructed units as to price, value or comfort. In conclusion to this sector, short-term leases with transient tenants who refuse to invest longer than a year at a time are your best bet to invest in Tucson real estate.
Home sales values have increased by 4 percent from 2014 and medium home prices are now $165,000. The math on this medium priced home is household income of $70,000 or above as to affordability and mortgage qualifications. This does not compute with a weak job market, minimum wage, and paying for healthcare and retirement savings. Add to the ever escalating cost of a college education, forced layoffs of university staff, and future growth for Pima County through huge bond indebtedness, the future is bleak for new single-family homes and further residential community development. During the better times, Tucson’s best economy was with a white-hot residential construction. Today, Tucsonans rent and the shorter commitment the better. Most long-term investors must be confident to win the risk versus return gamble.
Top investment transactions in all other major sector areas now follow with the investment assumption of user driven being most popular versus the active investor. In Industrial, the top 9 transactions had only three driven by investors, which produced a capitalization rate (cap rate) yield range of 8.3 to 9.5 percent, fairly high in today’s world. On a per-square-foot basis, the range was $183.00 to a low of $18.00. In Office, the cap rates were 7.59 to 9.2 percent with a per-square-foot range of $262.00 to $48.00. Last but always first in sector vitality is Retail with cap rates of 5.3 to 8.2 percent.
Low cap rates mean high demand for sector type product. Retail per-square-foot was a chart topping $492.00 to low end of $72.00 for the top 9 transactions. Retail was twice the high and low value as compared to Office and Industrial.
Why the disparity? Publicly traded NYSE institutions of value that sign long-term leases and are market leaders are demanded in every neighborhood center or high traffic corners of emerging cities.
In conclusion, Tucson is not a national market leader in investments trends. We are considered only when major markets become over heated and over developed. We are only a consumer and service market. Asset preservation and savings are top priorities to local investors. Unless high paying jobs are created to support affordable housing starts, Tucson will be without an overall safe, diverse, and favorable long-term regional investment plan.