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Tucson CRE Midyear Investment Market Report

Posted on Jun | 2017

Mike Gross, commercial real estate agent Office for sale or leaseINVESTMENT OVERVIEW

Michael Gross

Investment Specialist

With the Stock Market gaining over 2,500 points since the Presidential election, which is an approximate 13 to 14 percent increase, why would investors invest in real estate both nationally and locally?   The best answer is stability.   The stock market, though it is making unprecedented gains since the election, is not a consistent and stable platform for relatively secure investments.   For the most part, though subject to cycles, the real estate markets are somewhat stable.

Nationally, commercial real estate investments seem to be continuing in an upward trend, as they did for 2016 and the first half of 2017.   But, locally, we seem to be lagging behind the national trends a bit, with the exception of Multi-Family sales, which I will get back to later in the report.  I think the reason we are lagging behind the national trends is due to the following, which I found while researching Tucson Employment Statistics:

Overall Statistics

Tucson United States
Unemployment: 6.10% 5.20%
Sales Tax: 8.10% 6.00%
Family Median Income: $46,948 $65,443
Recent Job Growth: 0.89% 1.59%
Future Job Growth: 35.68% 37.98%

 

 

 

 

 

 

Population By Occupation

Tucson United States
Management, Business, Finance: 3.33% 14.54%
Engineering, Computers, Science: 0.00% 5.34%
Education, Library: 16.67% 6.13%
Arts, Design, Media, Sports, Entertainment: 1.67% 1.91%
Healthcare Practitioners and Technology: 0.00% 5.67%
Healthcare Support: 10.0% 2.51%
Firefighters, Law Enforcement: 6.67% 2.23%
Food Preparation, Serving: 0.00% 5.76%
Building Maintenance: 0.00% 4.01%
Personal Care: 0.00% 3.65%
Sales, Office, Administration: 20.00% 24.36%
Farming, Fishing, Forestry: 20.00% 0.73%
Construction, Extraction, Maint / Repair: 18.33% 8.24%
Production, Transport, Material moving: 3.33% 12.09%

Any investor looking at Tucson can find out the details as I did and this might be one of the reasons for Tucson lagging as an investment mecca, because there is a lack of depth to our job market.   But one of the positives I see in the above statistics is Future Job Growth, which is approximately 36 percent over the next several years.   This job growth has put Tucson on the investment radar and why we are seeing signs of out-of-town and out-of-state investors looking seriously at Tucson and/or actually making a move again on Tucson.  But just like typical growth patterns of an area or market, the housing is developed, then the multi family, then the retail market to support the residential growth, then the office market to house the job support the second phase of growth and finally the industrial to support the manufacturing growth.   This is what we are continuing to see in Tucson.  But, with 5,300 new jobs coming to Tucson in the near future (Caterpillar, Raytheon, Comcast, etc.) and 7,100 predicted for 2017, the demand for investment property in Tucson in all sectors will continue to grow.

Regarding Multi-Family, investors are buying nearly every Multi-Family property on the market.   These buyers are from all over the country from California to Washington from New England to the southeast.  The Multi-Family market is continuing to be the most active sector of the Tucson Real Estate Market because of the above and because it has higher absorption than other areas of the country, investors are looking at making Tucson a very attractive location for their money.

With overall vacancies near historic lows at about 6.5 percent, an 800-unit absorption over this period last year, low interest rates continuing and rising rents, it is no wonder why this sector has out-performed the other sectors in Tucson.  The only concern I would have is the low CAP rates as compared to the other sectors on the market.  Developers in Tucson are continuing to build apartments to catch up on a lull of construction over previous years to take advantage of renter demand and older inventory, 25-30 years old.  This inventory lacks in the newer design and amenities developers today are producing.  Two of the properties below are probably value-added opportunities as they will most likely be improved to today’s standards and then they will increase their rates.

The top 4 sales for Multi-Tenant properties this year are the following:

Name Address Year Built Price CAP Units Price/SF $ / Unit
1. The Enclave 7300 N. Mona Lisa 1986 $21.8M 5.6% 300 $83.53 $72,667
2. La Entrada Apts. 255 N. Granada Ave. 1985 $17.5M 5.2% 186 $93.71 $94,086
3. Sedona Springs 373 N. Wilmot 1973 $15.5M Unkn 408 $77.11 $37,895
4. Peaks at Redington 7700 E. Speedway 1980 $14.5M 5.6% 301 $66.60 $48,173

top office sales 2017The Office Market has been somewhat active with some large users relocating, positive absorption (56,000 square feet), vacancies decreasing to 10.9 percent (per CoStar, which we feel is at least 3 percent lower than actual) and rents remained relatively flat, but beginning to rise.  The office building sales activity has been somewhat mixed for the first half of 2017 with only smaller properties being sold.    Four (4) transactions for buildings over 15,000 square feet for a total volume of $20,500,000 sold.  The only CAP rate disclosed was 6.09 percent for the largest sale.

The top 4 sales for Office Properties this year are the following:

Name Address Year Built Price CAP Sq. Ft. Class Price / SF
 1. 7741 N. Business Park 1982 $13.3M 6.09% 50,509 B $262.84
2. 4575 E. Broadway 1975 $3.0M Unkn 18,969 C $158.15
3. El Encanto  2919 E. Broadway 1984 $2.4M Unkn 29,610 C $81.05
4.  5049 E. Broadway 1979 $1.8M Unkn 25,878 C $69.56

top retail sales 2017Retail in terms of vacancy and rental rates were relatively flat for the first half of 2017.   Alhough reports are only available for the 1st quarter of 2017, net absorption was positive by 235,808 square feet.  The only sales of retail product for the most part was in 4 transactions greater than 15,000 square feet, of which $38,600,000 was sold in 2017.  The CAP rates disclosed on two of the sales were 7.2 – 7.5 percent.

The top 4 sales for Retail Properties this year are the following:

Name Address Year Built Price CAP Sq. Ft. Class Price / SF
1. Tucson Marketplace 1300 E. Tucson Mktp 2016 $15.5M 7.25% 53,678 A $81.05
2. Tucson Marketplace 1390 E. Tucson Mktp 2017 $10.2M 7.20% 29,900 A $340.24
3. Midvale Park 1625 W. Valencia 1998 $6.9M Unkn 54,012 B $127.75
4. Natural Grocers 5600 E. River 2016 $5.97M Unkn 15,100 A $395.19

The Industrial Market in Tucson saw mixed reviews compared to the national industrial picture.   The rental rate during the 1st half of the year decreased about $0.12 per square foot to $6.71 per square foot.  Absorption for the first half of the year was approximately 143,000 square feet.  Sales of buildings greater than 15,000 square feet through the first half of the year were in 4 buildings totaling 139,046 square feet with a dollar volume of $9.2 million.  Two were sold top users and one had a CAP rate of 7.54 percent.

The top 4 sales for Industrial Properties this year are the following:

Name Address Year Built Price CAP Sq. Ft. Class Price / SF
 1. 840-850 E. 18th St. 1974 $1.6M User 31,361 C $51.58
2. 5600 S. Arcadia 1987 $2.8M User 6,600 C $424.24
3. 4675 S. Coach Dr. 2000 $1.45M 7.54% 16,246 B $89.25
4. 6270 S. Country Club 1979 $3.35M Unkn 84,900 B $39.46

Overall, 2017 will be an interesting year in the Commercial Real Estate Investment Market as Tucson’s economy continues to improve and we attract more investors feeding off that positive.  The most activity will be seen in Downtown (thank you, Rio Nuevo), in apartments (though not at the pace of previous years…it has to moderate sooner or later) and land for homebuilders.  That said, investment sales have tapered off a little from 2016, with exception to Multi-Family, which investment picture seems to still be heading for the moon.