Year End Tucson Office Market Overview
Posted on Feb | 2017
TUCSON OFFICE MARKET OVERVIEW
Office / Medical Leasing Specialist
For the first time since the great recession beginning in 2007 (which nearly pulled the entire world economy into the worst depression since 1929), current conditions for the Tucson Office Market are partly sunny. There is a near term forecast for sunny skies & calm winds, but there is also a distinct threat of a haboob off in the distance in the form of geopolitical tumult. With the much brighter picture going forward, office users will likely be looking at higher lease rates and commercial building owners could be looking at higher sales prices, although there will be a tug of war involving higher interest rates, slightly higher cap rates, the potential for higher property taxes, but better income streams. This push pull will continue, but we see a generally upward trend. A real bright spot is the downtown core – we are aware of several investors contemplating more than 400,000 square feet of central business district office developments, over and above the already established good news from the likes of Caterpillar.
THE NATIONAL OFFICE MARKET (based on CoStar’s most recent report (2016 Q4 Review & Forecast)
- 2015 was the best year since the downturn, but 2016 was quite strong, and the overall picture is still positive.
- Net absorption is expected to increase by 2 percent; the vacancy rate is anticipated to decline from 10.4 to 10.3 percent; rent growth is expected to increase 3.1 percent year over year; and there will be a substantial increase in new buildings delivered to the market.
- Demographic Headwinds Will Limit Trump-Era Growth – i.e., the year over year change in the working age population has been in a steady decline since President Johnson (2.5 percent increase) to the current day (less than half of 1 percent).
- GDP is trending up.
- Corporate sales & profits are still positive.
- Office using employment remains strong.
- Occupancy will continue to rise until 2018.
- Top quality assets capturing most demand.
- New construction trending up (with Texas as the notable exception).
- Inflation pressures are increasing, but still modest by historical standards.
While optimistic, my own view is that there is a great deal of uncertainty in the world economy given political developments in Europe and the United States. The stock market is relatively giddy about the outlook for the economy, and businesses look favorably on the prospect of less regulation and more tax cuts. However, I can just as easily imagine that the type of political upheaval we’re currently facing (potential trade wars, disruptions to long entrenched trade agreements, and international conflict) could provide a major disruption to that positive picture. Time will certainly tell.
TUCSON’S ECONOMY & OUTLOOK
- Tucson’s economy is “poised for significant growth over the next two years” according to George Hammond of the University of Arizona (December 2016).
- A recent report from Bloomberg lists Tucson as having the third-fastest job growth rate of any metro area in the country.
- Tucson’s job growth is projected to increase from 0.6 percent in 2015 to 1.4 percent in 2016, to 2.0 percent in 2017. These growth rates translate into 5,300 new jobs this year, 7,100 new jobs in 2017, and 7,600 new jobs in 2018.
- The National Association of Realtors currently ranked Tucson as its ninth strongest market for 2017. Housing prices rose 6.7 percent in 2016 statewide, with delinquencies & bankruptcies trending down dramatically.
- Mayor Jonathan Rothschild notes that “the addition of thousands of six-figure local jobs in the coming years from major corporations such as Caterpillar and Raytheon will bring an influx of new transplants and better opportunities for our current residents. He is asking all citizens and all business leaders to support the half-cent sales tax for investment in roads and public safety, as one key to insuring that these positive signs remain positive and grow even stronger.
Tucson Office Market Headlines
- We anticipate many positive and significant developments in the Tucson office market in 2017 and beyond. Not only have we bounced off the bottom of the greatest recession since the Great Depression, but there is a renewed momentum to the market that hasn’t been seen or felt for years.
- Tucson’s Vacancy Decreases to 11.0 percent in the last quarter (had been 11.4 percent at the end of the third quarter). Will continue to decrease in 2017.
- Net Absorption Positive for 2017. There was 124,704 square feet in the last quarter, 410,888 square feet positive absorption for all of 2016 (more than the prior two years combined).
- Class-A projects vacancy at 10.2 percent; Class-B projects vacancy at 12.6 percent; and Class-C projects vacancy at 6.1 percent.
- The overall vacancy rate in Tucson’s central business district remained at 7.0 percent from the prior quarter.
- The vacancy rate in the suburban markets decreased to 12.1 percent, down from 12.6 percent from the prior quarter.
- The amount of vacant sublease space in the Tucson market decreased to 13,731 square feet, down from 32,091 square feet the end of the third quarter, and 60,885 square feet the end of the first quarter.
- The average quoted asking rental rate for available office space, of all classes, was $18.59 per square foot per year, a slight drop in price from the end of the prior quarter ($18.68). Expect rates to rise slightly in 2017.
- During the fourth quarter 2016, one building totaling 17,000 square feet was completed; one building totaling 1,955 square feet was completed in the third quarter; one building totaling 3,000 square feet was completed in the second quarter; five buildings totaling 108,950 square feet were completed in the first quarter.
- There were 16,271 square feet of office space under construction at the end of the fourth quarter.
LARGEST LEASE SIGNINGS
- 35,001 square feet by Caterpillar, Inc. at 97 E. Congress
- 27,228 square feet by Ascensus, Inc. at 9070 Rita Road
- 26,791 square feet by Cornerstone Behavioral Heath at 1400 N. Wilmot Road
New buildings delivered to market in 2016 include:
- 440 W Paseo Redondo – Manning House, a 36,950 square-foot facility (100 percent occupied).
- 1915 E Innovation Park Drive – Ventana Medical Systems, a 28,335 square-foot building (100 percent)
Largest Projects Underway at the end of 2016 include:
- 4330 E. Broadway Blvd. – Girl Scouts of Southern Arizona, 11,771 square feet (100 percent pre-leased)
- 3955 E. Fort Lowell Rd. – Catalina Eye Care, 4,500 square feet (100 percent pre-leased).
- Total office building sales activity was up compared to 2015.
- For buildings 15,000 square feet or larger, there were 10 sales transactions in the first nine months of 2016 with a total volume of $51,405.00 ($130.53/SF average), compared to eight transactions in 2015 with a total volume of $45,332,000.00 ($170.28/SF average).
- Cap rates have been lower in 2016, averaging 8.44 percent compared to the same period in 2015 (8.61 percent).
- One of the largest transactions that has occurred within the last four quarters is the sale of 1 S. Church, 240,811 square feet, sold for $32,000,000.00, or $132.88 per square foot – the property sold on 10/2/15 at a 6.00 percent cap rate.