TUCSON OFFICE MARKET OVERVIEW
Michael A. Gross / Douglas Richardson
Office / Medical Leasing and Investment Specialists
For the first half of 2015, we are continuing to see a slight increase in activity, but it seems that companies are looking out in the market only to go back and renegotiate with their current landlords.
As reported in our July 2014 and January 2015 Office Market Forecasts, the medical office and medical-related office users and activity seem to have increased more than the typical office user, which is the primary reason for the recovery. But due to that fact, all businesses effectively realize and benefit from this increased activity, not just medical. We continue to see Urgent Care and Surgery Centers pop up all over town. Though the medical related increase is most certainly due in part to the Affordable Care Act, even if Congress would change the current Act, there is still a need for medical expansion due to our national aging population. And with that, we are seeing increased activity from Assisted Living companies looking at Tucson.
LEASES AND SALES
What we are also seeing in the Office Market is a continuing increase in concessions, lowering the rate from the asking rate, free rent, etc. As an example, in reviewing a recent Lease Comps Report from CoStar while doing an analysis of a property, I looked at rental comps of 52 leases for the last full year, most of which were renewals (about 93%) and the asking rents were between $18 and $26 Full Service, yet at the end of the report, the following was included:
Gross Asking Rent / sf Gross Starting Rent / sf Gross Effective Rent Avg. Free Rent
$16.06 $17.81 $12.21 2.0 months
The “Effective Rent” is the first year rent after all the concessions are added into the deal, understanding that the free rent is typically up front, so the first year rent is somewhat distorted and the Gross Starting and Gross Asking might be backwards.
Since December, 2014, the largest office building sales have been the following:
ADDRESS SQUARE FEET PRICE
4400 Broadway 121,700 $8,125,000.00
6303 E. Tanque Verde 30,588 $1,495,000.00
3915 E. Broadway 28,534 $3,900,000.00
1617 E. Skyline Dr. 19,761 $9,047,000.00
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.
The average Class “B” Rental Rate (asking) is $18.57 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 $15.39 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 city-wide vacancy remains at approximately 18 percent, although that will be reduced with 2 major announcements of space being absorbed in the very near future.