Posted on Feb | 2017
Nationally, commercial real estate investments in 2016 boded well. All investment markets were very strong and active as investors continued to chase yield throughout the year. In some cases, driving cap rates to as low as 4 percent in multi-family, the darling of commercial real estate the past few years. Economic performance in 2017 could benefit from the carryover of last year’s momentum. This pretty much sums up Tucson’s commercial real estate market as well.
The past few years have been extremely favorable to the multi-family market. Developers in Tucson are building 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. Value-added opportunities will continue to attract interest. There were 197 sales transactions with $551,694,724 sold. Cap rates for apartments were 7.71 percent for 2016. For fourth quarter according to CoStar, this rate dropped dramatically for apartment sales of over $5,000,000 from the second quarter to the high 5’s. There were 24 sales over $5,000,000 with the average cap rate for the year being 6.4 percent. Smaller unit communities (25-100) also were active in which there were 47 sales totaling $77,531,385 for a cap rate of 7.65 percent.
Some of the more notable sales were:
The Office Market was also active as absorption increased (404,200 square feet), vacancies decreased to 11 percent and rents remained relatively flat. According to CoStar, office building sales activity was up compared to 2015 with 16 transactions for buildings over 15,000 square feet for a total volume of $70,952,990 sold for the year. Cap rates lowered to 7.98 percent, but for transactions greater than $3,000,000, we saw cap rates drop during the year to just below 7 percent for the fourth quarter and overall the cap rate averaged 7.7 percent for the year.
Some notable sales were:
Retail in terms of vacancy and rental rates were relatively flat, although net absorption was positive by 386,786 square feet. Sales of retail product was up over 2015, with 16 transactions of properties greater than 15,000 square feet, of which $175,484,670 was sold in 2016. Cap rates edged up to 6.95 percent. The largest transaction was the sale of Wilmot Plaza for $47,300,000 in September.
The Industrial Market in Tucson saw good gains in vacancy, positive absorption of 1,280,727 square feet, with no increase in rental rates. Sales of buildings greater than 15,000 square feet through year end were up with 22 sales transactions totaling $45,058,306. Surprisingly, cap rates trended higher for the year at 8.84 percent, up from 8.10 percent. One of the largest transactions last year was the sale of Tucson Airport Center according to CoStar. This four-building, 113,572 square-foot industrial park sold for $9,925,000 at an 8 percent cap rate.
Investment Land sales were few and 2016 was really not much different than the previous 10 years. However, that is about to change with a new administration in office that is pro-growth, seeking to stop the endless stream of regulations crippling our economy. This and strong job growth in Tucson (3rd in the country) will fuel the embers of homebuilding in the Tucson region. Residential sales were robust with over $3.2 billion sold last year. As excess inventory wears off, there will be less resale product to compete with the new homebuilders. Given the fact that there are few improved/platted lots in inventory, developers will now step into the Land Market to plat and/or improve lots for homebuilders as the demand will be there for them to buy in 2017. This will be felt in all sub-markets, but the demand is greatest in Oro Valley and the northwest market to Marana. We really haven’t seen much in investment sales for land, but that will change in the coming year.
Overall, 2017 will be a good 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 Rio Neuvo), 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 may taper off from 2016 because of the uncertainty of where cap rates will be heading…and by how much. No one wants to buy at the lowest point for cap rates, especially with the expectation of increases. This may take a few months to settle in as interest rates rise (expect two hikes this year, mid and year-end), but there is still a demand for yield and investors will continue to seek that in Commercial Real Estate in Tucson, albeit tempered with more thoughtful investor sentiment with a watchful eye on cap rates; yet, positive about Tucson’s future whose outlook is the best it has been in a decade.
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