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Tucson Office Market Overview 2017

Doug Richardson Commercial Real Estate Agent OfficeTUCSON OFFICE MARKET OVERVIEW

Douglas Richardson

Office / Medical Leasing Specialist

Roughly six months ago we declared that despite the fact that we live in the Sonoran Desert, the clouds were parting and the sun was shining for the first time in about a decade.  We also said the political climate is sticky and contains some dark clouds – stay tuned.  As anyone who has been in the commercial real estate business for any amount of time knows, the pendulum swings up, then inevitably down again.  It’s the length, breadth and timing of these swings that keeps prognosticators guessing.  Tucson is still chugging toward the top of the arc, and appears to be gaining momentum.  There are times when it pays to be a laggard.  We may still be riding the elevator up, waiving to much of the rest of the country as they wonder to themselves, “perhaps it’s time to take a look at Tucson”.

Our most significant and reliable data resource is CoStar, and its most recent public declaration tells us that office vacancies in Tucson have decreased to 10.9 percent, down from 11.1 percent at the close of 2016 (by way of comparison, the average vacancy rate for the entire country is about one percent point lower).  As always, we believe that CoStar understates the actual vacancy rate by a percentage point or two, simply because it’s nearly impossible for their data researchers to drill down far and accurately enough to hit pay dirt.  Bottom line is that the trend is still our friend when it comes to vacancy numbers, and that also applies to absorption and rental rates, both heading in the right direction, especially if you are a landlord.

top office sales 2017, tucson office market overviewThrough the first five months of 2017, the three largest sales (by dollar volume) are:

  1. 4575 E. Broadway Blvd., 18,969 S.F., three-star, single story building constructed in 1975 (extensively remodeled in 2010). Sales price $3,000,000 ($158.15/S.F.).  Purchased by Sinfonia Healthcare.

 

  1. 2919 E. Broadway Blvd., 29,610 S.F., two-star, three story building constructed in 1984. Sales price $2,400,000 ($81.05/S.F.).  Purchased by Center for Employment Dispute Resolution.

 

  1. 5049 E. Broadway Blvd., 25,878 S.F., two-star, two story building constructed in 1979. Sales price $1,800,000 ($69.69/S.F.).  Purchased by Community Foundation for Southern Arizona. 

 

For the same period, the three largest leases (by size) are:

  1. 9070 S. Rita Road, 27,228F. occupied by Ascensus, Inc. (a retirement and college savings services provider). Three-star, 3 story building constructed in 1980, owned by the University of Arizona.  The current vacancy in the building is approximately 32 percent.

 

  1. 5151 E. Broadway, 13,209F. occupied by Bayview Loan Servicing. Four-star building, multi-story mid-rise constructed in 1974.  The building’s vacancy rate has dramatically declined in 2017.

 

  1. 551 W Magee Road, 11,120F. occupied by Carondelet Health Network. Two-star, single story building constructed in 1995.

Other highlights for the first quarter of 2017 include:

  • Net absorption for the overall office market was positive 56,438 square feet, with Class “B” offices marking the only positive absorption figures (both “A” & “C” experienced some negative absorption.
  • Average rental rates were up again over the prior quarter (up 1.4 percent to $18.64 per square foot).
  • There was still 88,631 square feet of new construction still underway as the quarter ended (that includes a 61,000 square-foot facility being constructed for Casa De Los Niño’s, and a 11,771 square-foot facility for the Girl Scouts of Southern Arizona.
  • The central business district continues to experience a strong economy, with a vacancy rate of only 6.8 percent across all classes of office structures.
  • The vacancy rate in the suburban markets decreased to 12.0 percent from 12.2 percent in the prior quarter.

Overall, it’s a pretty picture for Office finally, and getting more glamorous all the time as we seem to hear at an almost monthly rate of some new enterprise either considering Tucson or making firm plans for expansion in the Old Pueblo.  It is jobs and an expanding economy that fuels the Office Market.  Tucson experienced 5,300 new jobs last year and 7,100 are expected this year.  Vacancy is falling, rates have firmed and are beginning to move up, and the Office Market which has suffered for many years is rebounding well.

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