Pat Darcy, Retail Division Head at Tucson Realty & Trust Co. Looks at 2014 Tucson Commercial Real Estate Retail Market
As we look forward to 2014, the Tucson Retail Market is steadily improving, similar in its performance to last year…two steps forward and one step back!
The current retail vacancy rate is approximately 8 percent. There was approximately 800,000 square feet of positive net absorption for the year. Quoted retail lease asking rates are averaging $15.70 per square foot NNN.
In my opinion, there are three reasons for the Tucson market increased absorption of retail shop space: (1) the small amount of new retail construction in the past few years; (2) the redevelopment of central area properties by retailers such as Wal-Mart Neighborhood Markets, Walgreens, CVS, Quick Trip and Circle K; and (3) the leasing of most of our vacant big boxes to tenants such as Stein Mart, Hobby Lobby, Chuze Fitness, Floor & Décor at Broadway & Kolb, and Conn’s Home Entertainment on the Broadway corridor.
The redevelopment of properties in central Tucson has been a good thing. There was too much outdated retail space in Tucson’s central core and assemblages have taken these older, smaller retail spaces off the market and replaced them with new spaces and stronger retail tenants. A good example of this in 2013 was the redevelopment of the old El Mercado Shopping Center at the southwest corner of Broadway & Wilmot. Approximately 40,000 square feet of obsolete shop space was taken down for a new drug store and pads for new retail stores.
As far as I know, there was only one speculative retail center built last year. Steven Mar built a 10,000 square foot retail building west of the intersection of Ina & Thornydale. People in the retail business thought Steve was a brave man as he started construction last spring without any tenants. The space was 100 percent leased before the building was completed (it was leased by yours truly). New retail developments near major intersections are very attractive to tenants.
In my opinion, there will not be a lot of new retail development in 2014. Two major retail developments that will open this year are Houghton Town Center at Houghton and Mary Ann Cleveland Road in southeast Tucson. It will be anchored by a super Wal-Mart scheduled to open in March. Other pad-type retailers like Discount Tire and Panda Express will be there. On the northwest side, Conn’s Home Entertainment (40,000 square feet) and Guitar Center (11,500 square feet) are currently under construction at Marana Marketplace, a Larsen Baker development at the southwest corner of Orange Grove & Thornydale. Whole Foods will open a new larger store in Casas Adobes Center at the southwest corner of Ina & Thornydale.
Due to the recession, a major change has occurred in the timing of when anchor tenants (such as grocery stores) purchase or lease their sites. Before the recession, in order to get the best corners in suburban growth areas, supermarket developers would agree to deals by looking at home builders’ new home projections. When the homebuilding suddenly stopped, they were stuck. Now grocery anchors want to see actual rooftops before making a decision! Expect more retail developments announced later in 2014 and 2015.
There have been a number of notable sales transactions in 2013. On that, I would like to talk about the recent sale of River Center, located at the northeast corner of River and Craycroft, which sold to Calpers for $24,775,000. At a 5.8 percent cap rate, the lesson here is that a new anchor tenant can really revitalize a shopping center. Larsen Baker had weathered the loss of their anchor tenant and the recession. The ABCO space was vacant for nine years. The center struggled with the vacancy rate at 50 percent, but Larsen Baker, along with a small group of River Center retailers and neighborhood support, hung in there. That all changed in 2013 when Whole Foods and later Petco opened their doors. The center is currently 100 percent leased and the loyal River Center retailers are finally taking advantage of the increase in foot traffic generated by Whole Foods.
At our last Market Overview in June, I mentioned that Wal-Mart was dominating the Tucson area retail scene. That trend is continuing. In 2013 Wal-Mart opened three Super Stores or “T-99’s” as they call them in Tucson. In addition, the three Wal-Mart Neighborhood Markets that were under construction the last time I spoke to you are all now open for business. Wal-Mart is still very aggressive in Tucson.
Expect several new restaurants to open in Tucson. Longhorn Steak House will open its first restaurant in Tucson across from Park Place in May. It plans to open a second location in the Tucson Mall area. Others who have recently arrived in Tucson, like Smashburger, Freddy’s Steakburger, Chick-fil-A and Culvers, will likely continue to expand.
I also want to spend some time talking about the downtown retail activity. In the past five years, over 150 businesses have opened in the downtown area. They include over 60 restaurants, 53 retail stores and 18 nightclub destinations, with almost all of them locally or statewide owned. The 400-bed Cadence student housing project located in Plaza Centro on Congress Street and 4th Avenue opened in August. Other student housing projects, two apartment buildings and 35 homes are underway, which should attract more retailers.
MY PREDICTIONS FOR 2014
Look for more nontraditional shopping center tenants such as health clubs, charter schools, pawn shops, thrift stores, churches and medical care facilities to lease space in retail centers.
High-visibility retail pads and endcap shop space will command retail rates in the $30.00 per square-foot range.
El Con Center will be sold this year.
An outlet center will be built along I-10 (but not at I-10 and Avra Valley Rd.). Most likely, it will be a premium outlet center at I-10 and the Twin Peaks interchange in Marana.
By late summer, to follow the increased homebuilding activity, retail developments to be announced in 2014 and 2015 could include the intersection of I-10 and Valencia Road, Tangerine Rd. & I-10, NEC of Broadway/Wilmot and I-10 & Marana Road. Look for Wal-Mart and Fry’s to be the possible anchor tenants.
Look for the Bridges at Kino/I-10 to add another large anchor tenant to fit between Costco and Wal-Mart who are both experiencing sales above projections.
Watch as Wal-Mart plans to open three to five stores in 2015.
Look for more independent gas stations to close.
Some familiar restaurants will close. As every new restaurant opens, it takes customers from other nearby restaurants.
Mom and Pop tenants will continue to fight the battle with the chain stores.
With the merger of Office Depot and Office Max, I expect four of their nine stores in Tucson to close.
The road widening projects, such as Grant Road from Oracle to Swan Road will continue to create higher vacancy rates along Grant Road due to the uncertainty of the timing of the road work and the possibility of the City purchasing properties.
The Retail market in Tucson is improving and empty big boxes are becoming fewer and fewer, so I’m positive about Tucson. The Retail market has turned and good things will be in store for the retail trade in 2014.