Terry Lavery, CCIM, CPM, GRI
The Tucson Real Estate Investment market is in a quandary. Huge out-of-state investors have purchased over $100 MILLION DOLLARS of Tucson’s finest retail properties so far this year as these investors are looking across the country for premium properties to invest in. Our Central Business District is continuing its six year renaissance with a potential new convention center hotel and further downtown development. Oro Valley is exploding along Oracle Road with new development all the way to the Dove Mountain Resort. Marana has two discount malls competing for space along a recently improved I-10. National private REITs have raised over $19.6 billion dollars for more purchases nationwide. The stock market is trading near 2007 highs. Wall Street has great merger and acquisition activity. Life seems so much better than our recent five years. Why worry? What’s the quandary?
We should worry because we are reporting on real estate investing that has risks and returns. Our risks moving forward are formidable. Our government has spent all its energy to get our economy to this point and our recovery has been pathetic in terms of annual economic growth and job creation, especially here in Tucson. The dysfunctional legislative branch of our national government has not passed a budget in six years and controls spending by sequestrations. Furthermore, now we have only a few weeks left for congress to fix 2014 before mid-term elections by our congressional calendar. Iraq is a mess, with predictions that oil could shoot over $150.00 a barrel which would have a severe impact on our economy, especially considering its fragile state. Finally, the sinister phenomena known as inflation with rising food, meat, oil, gas, rent, and medical costs is lurking around the corner. Recently, chicken, beef and fish hit all-time highs. The Fed Chairman says inflation is in check, but they are considering raising interest rates. Why worry?
As to local business velocity, we are not at 2005 levels for residential or commercial in Tucson. Compared to other markets of similar size to Tucson, we have one-third the economic purchasing power as compared to our city’s peers. When we compare office and industrial markets, we in Tucson follow distribution centers (New York, Chicago, Inland Empire, and Dallas) and primary markets (Houston, Phoenix, Denver and Atlanta). For those fore-mention cities, they have functional governments that create a growth opportunity, in which Tucson receives a little trickle-down effect. Arizona state income tax on corporations does not help major employment relocations and the ACA has little money to give. Buyers and investors seek stable and improving markets to invest. We have many choices of old mom and pop buildings which are not intuitional grade quality and lack the 40-foot clear heights demanded by, say a logistic company. We have to build-to-suit to entice new business to Tucson with current demanded properties….not Tucson’s currently available old, functional obsolete buildings with low rent projections and high property taxes. Tucson CAP rates are currently between 4 percent and 12 percent based on location, size, quality, income, and property type. The best investments currently are mostly multi-family under 50 units. Premium properties, such as El Con, are selling at a premium.
However, it is difficult to get excited to invest in Office, Industrial, or Land given Tucson’s current economic condition and lack of business vitality or velocity. Apartments (greater than 100 units) are not that attractive given the low cap rates and the threat of Davis Monthan closing. This real danger is casting a dark shadow over all investment classes.
In conclusion, without a middle class to buy homes or consumer goods and a robust job environment which provides stability, our investment market will continue to suffer. If the Fed raises interest rates beyond reasonable expectations, the predictable downturn would not only affect our economy, but specifically the few bright spots such as our university and the central business district. It may get ugly, but the closure of DM would be a disaster. Interest rates will become favorable again, but DM’s closure would affect Tucson for decades.