INDUSTRIAL MARKET OVERVIEW
Chuck Blacher
Industrial Specialist
The Industrial Market in Tucson seems to be on its own flight path. It certainly hasn’t taken off with the National economy or some of the markets here in the United States. Our Industrial vacancy rate in Tucson at the end of the first quarter hovered around 7.5 percent. Rental rates for the same period decreased from $6.83 per square foot to $6.71 per square foot.
The overall U.S. Industrial Market is maintaining growth at a record-breaking pace. The national Industrial vacancy rate continued to decline in the first quarter to 5.3 percent, well below the 10-year national average of 8.3 percent. Nationally, demand remains promising for 2017 and a year of solid growth. Also, nationally, construction is up 24 percent over the fourth quarter of 2016. Dallas, Atlanta, Cincinnati, Chicago, Memphis, Phoenix and Stockton are some of the more vibrant markets. The lowest vacancy rates nationally are Los Angeles, Savannah, San Jose, Nashville, Seattle and Detroit. The New York City area along with San Francisco had the highest combination of growth in market rents and occupancy gains for the past two years. Sales volume currently in New York City plummeted 58 percent compared to last year. Uncertainty about the fate of Trump’s economic agenda could hold up deals across the country. Real Estate investors worry that Trump’s industry-friendly tax cuts will fail to pass and at the same time, others figure that lower taxes and higher spending could spark inflation and rising interest rates in the debt-driven business.
Tucson, unfortunately, is taxiing around the runway trying to figure how to get the Industrial market off the ground. Our city is dependent on the Hospitality and Home-building trades which, fortunately, are relatively active as we speak. Manufacturing is a challenge here and nationwide due to less expensive labor costs across the border and Far East. Warehouses sell real estate but don’t employ a lot to people.
Industrial absorption in Tucson in the first quarter was 92,644 square feet as compared to 240,000 square feet absorbed in the fourth quarter of 2016, 994,451 square feet in the third quarter and 227,485 square feet in the second quarter of 2016.
The largest lease signing was 16,437 square feet signed by Stratsys on Hemisphere Loop in the south market, 13,440 square feet signed by Kawasaki at Business Center Drive in the north market and 11,406 square feet signed by Filter products at Fremont Avenue in the central market.
The largest project underway at the end of the first quarter is for Old Dominion Freight, a 20,160 square-foot building pre-leased to the tenant and a 19,811 square-foot building pre-leased to Switchgear Solutions.
Total Industrial sales of 15,000 square feet or larger were in 4 buildings up to June 1, 2017. The transaction volume was $3,990,207. Total square footage was 77,752 square feet with an average sale price of $53.80 per square foot. During the fourth quarter of 2016, transaction volume was $8,519.842 in five buildings totaling 172,455 square feet with an average per-square-foot price of $49.40 per square foot as compared to six transactions totaling $22,300,464 in the third quarter. The total square footage was 314,008 square feet with an average sale price of $71.02 per square foot.
The second half of each of the past five years have been disappointing for the Tucson Industrial Market. The first half of 2017 is modest at best with no major announcements for the Industrial sector, though rumors abound. Whether our market will rebound in the second half is anyone’s guess; however, housing, both the resale market (up 11.5 percent) and the new home sale market (up 12.3 percent) are on fire. With new construction slated to meet rising demand, many smaller industrial properties should see increased leasing and sales activity as the trades that feed home construction comes back to Tucson and the existing tenants expand.