Tucson Commercial Real Estate 2019 Recap and Forecast for 2020
Hank Amos, President
The residential market set another record for 2019. Total Closed Volume sales were $4,510,710,696 up 10.4%. Last year’s sales were up 10.2% over 2017. Pretty remarkable. Sales were up this year due to the strength of our economy over previous years. People feel confident about their job or the ability to get a better job, increased wages, growing business employment base and extremely low mortgage rates. All of this led to a record year. Avg. price of a new home is around $345k. Avg. price of an existing home is a little over $260K.
Again, the strong US economy finally hit the shores of Tucson last year. We saw a little of it in 2018, but not the full impact as we did the past year. Tucson’s economy was finally up a running again and all businesses were doing well….. significantly better than years past. So with that, we saw consumer confidence up and businesses moving into or expanding in our community. Investors who’s businesses were doing much better or whose personal investments were doing better (stocks), were also participating in this market. In addition, due to the long recession we experienced, Tucson commercial Real Estate values were still compressed compared to other areas of the country. So investors outside of our market were making deals here to take advantage of the relatively low RE values and higher cap rates Tucson offered.
The vacancy in Office has been pretty stable the past year or so fluctuating between 8.5% and 9%. With that, rental rates have remained pretty consistent as well, hovering around the mid $19/SF to approx. $20/SF (really not moving that much the last decade after hitting a low in 2014). While the business economy certainly got better the past year, there is still not enough demand or enough rental rate increase to justify new speculative development, though we will see some of that coming to Tucson late this year or next in the Downtown market. The incentives that Rio Nuevo has to offer in Downtown has a lot to do with this. Medical development still continues to lead the way for Office development.
The past decade has seen a good drop in vacancy especially over the past year or so where we are now hovering around 5.5% to 5.7%, though we did see some negative absorption this year. Rents dropped from a high in 2010 to about the mid $15/SF, though that is up from $14.75 when we started the year. So as occupancy increased, rents started rising again. That said, many retailers are still feeling the Amazon effect and it is becoming increasingly difficult for mom & pop retailers to compete with price, inventory and now min. wage increases again. Only those retailers that are unique and have something of value or need can compete these days. Not all retail can only operate online. You do have to have some kind of brick and mortar strategy to effectively compete and generate your highest revenue sales potential.
The Industrial market has continued to demonstrate strength, especially with the absorption of the Amazon Distribution warehouse in 2019 and with the delivery in the past of logistical space users such as Fed Ex and HomeGoods as well. Vacancy has continued its downward trajectory and is now around 6%, a sharp drop over the past four years. That said, leasing rates are in the mid $6.00 range and have not gone up as much as one would expect, though it has gradually gone up this year from the start of the year at $6.15/SF. Market rents for logistics space and specialized industrial space is around $7.80/SF and $8.50/SF respectively while flex space is averaging out to around $10.45/SF. Because rents are still relatively low, there has been a lack of speculative development, but this is also bolstered by the fact that developers are still not confident of business development or relocation in the Tucson area. While we have attracted some jobs, it’s still not enough in developer’s eyes to give them confidence to speculate their dollars. Investment cap rates are around 8%, maybe a little less and offer the best yields of any of the commercial asset classes.
Multifamily continues to be strong and continues to be the king of Tucson commercial Real estate as it has over the past decade. Cap rates are still crazy low, low 5’s for class A and 6’s for the rest and investors are still buying. Rents have continued to increase at a sharp trajectory in which they avg. around $820+ a unit. It wasn’t long ago that rents didn’t move for years and years. We had some of the lowest, if not the lowest rents in the Southwest. That’s not the case anymore. Vacancy is around 5.5% and that is down from just under 6%. The student housing market by the U of A saw more units built and there is still more to come. The developers build them, lease them up and then sell to national institutional capital. Apartment developers such as HSL and MC Companies have brought new inventory on line and will continue to do so.
Residential builder land is in hot demand. The problem is that you can’t find finished lot product. So developers are trying to meet that demand. When it does comes on line, the prices for dirt are pretty high. Finished lots are running from $1,000 per a front foot to $2,000/FF, even higher in certain areas like Rancho Vistoso or Dove Mountain. Generally, it is around $1,400/FF and moving to $1,600/FF in 2020. But it’s just not the supply side of dirt that is driving up finish lot prices, it’s the cost to develop it as well. Construction cost for finished lots have skyrocketed. Most due to labor costs as there is a lack of construction labor in our market. Remember, all the workers who were in this industry prior to 2007 left during the following 10 years for greener pastures. Now we are feeling the squeeze for lack of construction labor. This is also occurring in the production of housing as well. Expect significant price increases as these homes come on line. The cost of housing is going up and it is just not new housing, but existing homes as well as inventory continues to shrink because of record sales. Millennials don’t want the big one acre lots like past generations did. They want smaller lots with smaller yards so that they can put that money saved into their homes. They want all the goodies inside their homes and don’t want the maintenance of big yards. Also, more people are working out of their homes than ever before and this will continue to be the case in the years to come. So they want the plush inside as well for their working environment. The area that is in the most demand continues to be the Northwest, specifically, Oro Valley followed by Marana. Also popular is Vail and Sahuarita.
Tucson Commercial Real Estate 2019 Recap and Forecast for 2020