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Year End CRE Industrial Overview

Posted on Feb | 2017

Chuck Blacher Industrial Real Estate ProfessionalINDUSTRIAL OVERVIEW

Chuck Blacher

Industrial Specialist

The snapshot of the U.S. economy in 2016 showed continued slow to moderate growth (1.6 percent GDP), a solid housing recovery and a nascent rebound for business investment.

Existing home sales have been on a tear lately rising for several months, most probably due to steady job growth and low borrowing costs. In December, home sales softened.

While housing has been the pillar of growth, weak business investment has been the economy’s biggest drag for nearly two years. The oil price crash hammered crude producers and a weak global economy and strong dollar hurt U.S. exports; however, last year’s climb in oil prices spurred the beginning of a rebound for the oil industry.  Capital orders for non-defense big ticket items is down nearly 4 percent in November and up two consecutive months. Some economists think this development signals a turnaround.

The rebound in business capital spending helped the economy grow at a 3.2 percent annual rate in the third quarter, its biggest gain in two years. In the fourth quarter, however, business posted a disappointing gain. Consumer spending posted a solid increase, but weak exports tempered growth with the overall economy growing at a 1.9 percent rate in the last quarter.

The Tucson Industrial market ended the fourth quarter of 2016 with a vacancy rate of 7.8 percent. The vacancy rate was down over the previous quarter with net absorption totaling a positive 109,923 square feet in the fourth quarter. Rental rates ended the fourth quarter at $6.83, a very slight decrease over the previous quarter. There was 159,971 square feet still under construction at the end of 2016.

As mentioned, net absorption in the fourth quarter was a positive 109,923 square feet as compared to a positive 956,059 square feet in the third quarter, 226,882 square feet in the second quarter and a negative 12,137 square feet in the first quarter.  Great improvement from the recession years.

The Industrial vacancy rates in the Tucson market decreased to 7.85 percent at the end of the fourth quarter. The vacancy rate was 8.1 percent at the end of the third quarter, 8.5 percent at the end of the second quarter and 9.2 percent at the end of the first quarter of 2016.  A nice, steady decline in vacancy for the year.

The largest lease signing occurring in 2016 included a 360,000 square-foot. lease signed by MTD Southwest at 6978-7000 E. Century Park Drive in the south market, the 300,181 square- foot lease signed by The Chamberlain Group at 2850 E. Drexel Rd. in the South market and 70,000 square feet signed by Wal-Mart at 6630 S. Memorial Place also in the South market.

The average asking rental rate for industrial space was $6.83 per square foot at the end of 2016. This represented a 0.4 percent decrease from the third quarter when rents were at $6.86 per square foot.  Rates should increase a little for 2017.  During the fourth quarter of 2016 no new space was completed in the Tucson market area. This compares to one building totaling 856,288 square feet that was completed in the third quarter and one building totaling 5,200 square feet completed in the second quarter of 2016 and nothing completed in the first quarter of 2016.

There were 159,971 square feet of Industrial space under construction at the end of 2016. Some of the notable deliveries in 2016 was 858,288 square feet for Home Goods and a smaller 5200 square-foot building the second quarter of 2016 which is now completely occupied. The largest project underway at the end of 2016 was Aerospace Parkway, for World View, a 120,000 square- foot, preleased venture (possibly a bottle of whiskey will get you higher than the $75,000 fee for a ride to wherever), and a 20,160 square-foot building at 3375 E. Corona Rd. leased to Old Dominion Freight.

The total Industrial inventory in the Tucson market area at the end of 2016 is 41,807,257 square feet in 2,551 buildings. The warehouse sector is 32,208,284 square feet in 2,060 buildings.  Within the Industrial market there were 158 owner-occupied buildings amounting to 6,289,810 square feet of Industrial space.  Tallying Industrial building sales of 15,000 square feet or larger rose during the third quarter compared to the second quarter.  In the third quarter, seven building transactions closed with a total volume of $23,074,869 at an average price $54.53 per square foot that compared to five sales totaling $8,740.000 in the second quarter for an average price per square foot of $54.89.

Total year-to-date Industrial building sales activity in 2016 is up compared to 2015. In 2016, approximately 17 sales occurred with a dollar volume $38,767,869.  The average price per square foot was $56.31.  In the first nine months of 2015, total volume was $23,433,00 at an average price per square foot of $36.50.

One of the largest transactions in the past four quarters was the sale of Tucson Airport Center. These four buildings consisting of 113,572 square feet sold for $9,925,000, or $87.39 per square foot.  With employment increasing in Tucson from additional jobs at Caterpillar, Comcast, and Raytheon, a new home sales should rise, with it the business of all various building trades and contractors. Contractors take up warehouse space and contractor yards and thus, occupancy should continue to increase notably.

This looks promising for the Industrial market here in Tucson at least for the first half of 2017. The second half could be in trouble if the new administration fouls things up with our trading partners, notably Mexico.

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