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Tari Auletta, CCIM, Gives Office Overview for 2014 Mid-year report

Posted on Jun | 2014

Tari Auletta, CCIM Office and Medical PropertiesTUCSON OFFICE MARKET OVERVIEW

Tari Auletta, CCIM

Office and Medical Properties Specialist

Mike Gross reported to you at the first of the year that not much has changed in the last two years and that the Office Market vacancy rate was 18 percent.  Here we are six months later and the vacancy rate is still 18 percent, just as Tucson Realty & Trust Co. predicted.

 

We are not seeing new office users moving into the Tucson market and many office users are actually reducing the size of their space.  Tenants continue to shop for better deals in the market, only to use them as negotiating terms against their current landlord when their lease renews.  Any movement at all is really from existing tenants in the marketplace.

Thank goodness for office medical activity.  While the office market remains soft with little activity taking place, medical continues to shine.  My last several deals have been medical in which we are seeing:

  • Doctors breaking away from the current practice where they work and starting their own practice.
  • Office buildings converted into medical.
  • Urgent Care & Surgery Centers continue to pop-up all over town.  Former bank branch buildings, video stores and convenience markets have been converted into Urgent Care Centers in many locations.
  • Leasing space in Shopping Centers for more foot traffic and an abundance of parking.

There is still much uncertainty regarding the Affordable Healthcare Act and the impact that it will have on the private practitioners and the managed healthcare providers, so medical office could be impacted down the road as more doctors retire or move in with hospitals such as TMC.

The Current Tucson Office Market:

We are seeing rents being offered in some buildings at the same rates we saw in the 80’s.  The lack of activity has forced landlords to reduce rates as an incentive to attract potential new tenants to their buildings or to simply keep their existing tenants.

Class “A” building rents $18.50 – $20.50

Class “B” building rents $16.50 – $19.00

Class “C” building rents $12.00 – $15.00

Remember, these are only quoted rates and landlords have learned that if they get one chance with a strong tenant considering their space, they need to make the deal because they don’t know how long it will be before another tenant comes along.

With the current vacancy rate at 18 percent, the MDA building consisting of approximately 84,000 square feet, just purchased by Larsen Baker, will add another 60,000 square feet of available space  to the inventory.  While their current strategy was to look for large 20,000 square foot users, it may now be moving toward attracting smaller users as the 20,000+ users are currently hard to come by in Tucson.

One of the bigger deals that just happened is one in which I was involved for an approximately 20,000 square foot build-to-suite in the Skyline Esplanade Phase II Development with DESCO Southwest.  Once completed this will create additional vacancies in the properties they currently occupy around Tucson.

New construction in the market is a three-building development totaling 37,000 square feet currently being built at the northeast corner of North Swan Road and Skyline Drive, where Research Corporation Technologies will have their new office.

There is a Silver Lining – Now is the time to relocate and take advantage of all this great office space that is available and at great rates.  Eventually, the country and Tucson will recover and those great deals and the opportunity to save thousands of dollars in rent expense will be a thing of the past, although not for the remainder of 2014.