TUCSON OFFICE MARKET OVERVIEW
Michael A. Gross / Douglas Richardson / Tari Auletta
Office / Medical Leasing and Investment Specialists
January 29, 2015
Although Tucson Realty & Trust Co.’s year-end report does not necessarily line up with CoStar’s year-end report, we both agree that there has seemingly been increased activity in both the Office Market sales and leasing arenas. The 2014 approximate Positive Absorption of 188,000 square feet is less than one percent of the entire Tucson Office Market, but it does reflect a slight movement in the right direction. After nearly six years of negative pressures in the market and over the last 2 – 3 years of somewhat bouncing off the bottom, we feel the market is finally showing signs of a recovery.
As reported in our July 2014 Office Market Forecast, the medical office and medical-related office users and activity seem to have increased more than the typical office user, which is the primary reason for the recovery. But due to that fact, all businesses effectively realize and benefit from this increased activity, not just medical. We continue to see Urgent Care and Surgery Centers pop up all over town. Though the medical related increase is most certainly due in part to the Affordable Care Act, even if the new Congress would change the current Act, there is still a need for medical expansion due to our national aging population.
LARGER LEASES AND SALES
As an example, of the 12 largest leases signed in 2014, excluding 5 office renewals and one build-to-suit, approximately 71 percent of the remaining 7 were either medical or medical-related users, which reinforces our previous forecast and our year-end Office Market positive absorption. Regarding the 6 largest office building sales for 2014, 50 percent were medical.
- Muscular Dystrophy Association for 22,962 sq. ft. at The Offices at La Paloma
- Genesis OB/GYN PC for 22,395 sq. ft. at Tucson Orthopedic on TMC Campus
- Morgan Stanley for 20,000 sq. ft. at the northwest corner of Skyline Dr. and Pima Canyon Rd.
- CODAC Behavioral Health Services for 16,999 sq. ft. at 3130 E. Broadway
- Grand Canyon University for 16,212 sq. ft. at 3500 N. Campbell Ave.
- 3350 E. Hemisphere Loop 143,650 sq. ft. $18,934,095
- 4400 Broadway Blvd. 121,300 sq. ft. $8,125,000
- Offices at La Paloma 82,942 sq. ft. $9,100,000
- 6303 E. Tanque Verde 30,183 sq. ft. $1,492,000
THE CURRENT TUCSON OFFICE MARKET
In today’s market, for all classes of office buildings, the average quoted (asking) rental rate is $18.37 per square foot Full Service, according to CoStar.
The average Class “A” Rental Rate (asking) is $21.00 Full Service with an “Effective Rate” in the first year being lower due to free rent or other concessions.
The average Class “B” Rental Rate (asking) is $18.57 Full Service, again, with the “Effective Rate” being $1.00 to possibly $2.00 less in the first year due to free rent or other concessions.
The average Class “C” Rental Rate (asking) is $15.39 Full Service, again, with the “Effective Rate” being $1.00 to possibly $2.00 less in the first year due to free rent or other concessions.
When we mention “Effective Rate”, you need to account for all free rent and any reduced rate at the onset of the Lease.
VACANCY, NEW CONSTRUCTION AND RE-ALIGNMENT
The city-wide vacancy remains at approximately 18 percent, which increased some due to the new 100,000 square-foot building at Alvernon & 22nd and the newly renovated building on South 4th. Both housing quite a few State of Arizona DES agencies that were previously located in other office buildings throughout the central and southern parts of Tucson. The increase is further due to the 60,000 square feet at the MDA Building on Sunrise, the 37,000 square-foot building at North Swan Road and Skyline and the 67,700 square-foot building at 1 E. Broadway, all coming on line in the last 6 months. Due to the above new-to-the-market buildings, our year-end positive absorption could be somewhat skewed once all the relocations of the related tenants take place.
TWO NOTABLE PROPERTIES THAT SOLD IN THE 4TH QUARTER
Two very notable sales that took place in mid to late December of 2014 are 4400 E. Broadway and 6303 E. Tanque Verde. These “Diamonds in the Rough” were sold to very strong investors and will be going through major renovations taking them from B- and C+ buildings to A Class buildings once again.
4400 Broadway is located right in the heart of the city and is a landmark property that is home to Bank of Tucson. The Main Floor Lobby, Common Area Lobbies including the restrooms on all 8 floors, landscaping and more will all be upgraded. Recent new additions include the restaurant Les-Paul Lounge and the location of our recently elected Congresswoman Martha McSally. 4400 Broadway will truly be a “One of a Kind” Office location for Tucson, and at well below “A” Class office market rents.
The second building referenced is 6303 E. Tanque Verde, which is a high visible 3-story Garden Office Complex located where Wilmot, Tanque Verde and Pima come together. This building has some of the best views in Tucson. Major renovations have taken place with spaces ranging from approximately 600 square feet to 5,500 square feet. The rental rate right now is an amazing $14.50 Full Service. Three recently signed leases that took advantage of the below-market rates and great location are Pima Council on Aging, Lutheran Social Services Administration and Southwest Contractor’s Supplies.