TUCSON OFFICE MARKET OVERVIEW
Michael A. Gross / Douglas Richardson
Office / Medical Leasing Specialists
For the second half of 2015, we continued to see an increase in activity, but it seems that companies are still looking out in the market only to go back and renegotiate with their current landlords, although some have decided to do a somewhat lateral move to a new location to give them better access to their clients or vice versa.
As reported in our most recent Office Market Forecasts, the medical office, medical-related and State office users activity seems to have increased more than the typical office user, which is the primary reason for the recovery. Because of this, all businesses effectively realize and benefit from this increased activity, not just medical. We have seen over the last 2 years Urgent Care and Surgery Centers continue to pop up all over town. Although the medical-related increase is most certainly due in part to the Affordable Care Act, even if the new Congress would change the current Act, there is still a need for medical expansion due to our national aging population, especially here in Tucson with all our retirees. In conjunction, we are still seeing increased activity from Assisted Living companies looking at Tucson with two new facilities going up at River and Hacienda del Sol and the other on the recently sold 63-acre site where the Immaculate Heart Novitiate is located at 3820 N. Sabino Canyon Road.
LEASES AND SALES
We are continuing to see a continuing need for concessions to get deals finalized whether it is lowering the rate from the asking rate, free rent, higher amount of tenant improvements, etc. For example, it is my understanding that an approximately 14,500 rentable- square-foot national user moving to the East Central part of town is getting the following 10-year deal: Starting Full Service Rental Rate of $22.00, 2 – 2.5% annual increases, 6 months up-front free rent, $35.00 per square foot tenant improvements, an abundance of free covered parking with client parking spaces in addition to paying a full 5 percent outside broker fee to boot. Now that is what I call a relatively good building buying a tenant. The reason I am saying “buying a tenant” is because once you subtract the free rent, tenant improvement, free parking, and the brokerage fee, the bottom line for that Landlord over 10 years is approx. $17.50 per rentable square feet, per year. With operating expenses over the 10-year period possibly approaching $13.50 per square foot and financing in the $5.00 per square foot range, the Landlord could potentially loose approx. $1.00 per square foot, per year on that deal. In this economy, I am not sure how much sense that makes; however, the Lease is out for signature, so it must make sense to someone.
ADDRESS APPROX. SQUARE FEET PRICE
1 S. Church 230,000 $32,000,000.00
333 E. Wetmore 141,271 $26,500,500.00
3535 E. Valencia 100,250 $21,700,000.00
ADDRESS APPROX. SQUARE FEET TENANT
Tucson Galleria (4650 N. Oracle) 211,000 Comcast
3535 E. Valencia 100,250 Aetna Life Insur
333 E. Wetmore 52,008 Cenpatico of Arizona, Inc.
THE CURRENT TUCSON OFFICE MARKET
The average Class “A” Rental Rate (asking) is $21.00 Full Service with an “Effective Rate” in the first year being lower due to free rent or other concessions as I discussed in the example above.
The average Class “B” Rental Rate (asking) is $18.50 Full Service, again, with the “Effective Rate” being $1.00 to possibly $2.00 less in the first year due to free rent or other concessions.
The average Class “C” Rental Rate (asking) is $15.50 Full Service, again, with the “Effective Rate” being $1.00 to possibly $2.00 less in the first year due to free rent or other concessions.
VACANCY, NEW CONSTRUCTION AND RE-ALIGNMENT
The true city-wide vacancy is approaching the 16+ – 17 percent range as the vacancy starts to tighten a little throughout the market.
Regarding re-alignment, 4400 Broadway Blvd., for example, which is anchored by the Bank of Tucson, sold in December, 2015, has been going through a major renovation, the result of which has made the 4400 Broadway Building a “One of a Kind” for Tucson. Because of this realignment, two new tenants totaling approximately 20,000 square feet have recently signed leases bringing the building to over 80% occupancy. These two tenants are Breault Research and the Arizona State Retirement Systems, which will both take occupancy in February, 2016.
Although lease rates have remained flat over the last couple of years, as mentioned, we are starting to see a tightening of the vacancy throughout the market the past six months and with it, some increases in market rent. With the sales of University Medical Center to Banner, the Carondelet Hospitals to Tenet, 1 S. Church to a local investment group, the Comcast Cable Lease hiring over 1,100 new-to-Tucson jobs, the new HomeGoods Facility (which plans to hire approximately 600 + initially) all of this is contributing to a more positive outlook for the Office market in 2016.