TUCSON OFFICE MIDYEAR MARKET OVERVIEW 2016
by Doug Richardson
Most of us love life in the ‘Ol Pueblo’, though likely not because it’s a dynamic center of commerce, and not even because the prospect for much improvement is on the horizon. I love it because we don’t have tower cranes on every corner, we don’t have multi-lane freeways crisscrossing town, and we don’t have the feel and look of so many mid-size cities. Which is not to say that a little bit of that wouldn’t be a refreshing change of pace. I travel back to Seattle frequently, and the sky is dotted with tower cranes, and when you’re there it seems there is more going on in a city block than there is in all of Pima County, and that’s okay because we have a different quality of life. But still……
The health of our office market is wholly dependent on many factors, not the least of which is employment and job growth, and job growth is wholly dependent upon an improving economy and/or population growth. The unemployment rate in the U.S. stands at 4.7 percent. It’s a questionable 5.6 percent here in Tucson because it doesn’t take into account the underemployed. We added 10,400 jobs last year (that’s roughly 3 percent growth, so that’s positive). Population growth continues to inch up ever slowly. It is also dependent upon the health of the stock market (after a terrible start to the year, the S&P is up 1.92 percent for the year, but down 1.27 percent year over year). The Federal Reserve Board just postponed another interest rate hike, hinting at continued economic weakness across the country, and less than stellar payroll growth. Another factor is the relative health of the residential housing market (there was an 11 percent increase in home closings year over year, median prices are up 4 percent year over year, and the percentage of distressed home sales is down from 13 percent of sales in 2015 to just 10 percent of sales in 2016 year to date). For a change of pace, it now appears to be a seller’s market for homes priced up to $350,000, though still a buyer’s market for homes over that price point. You add all those various components together, and to me it totals a great big ho hum.
There are many indicators that the national office market has peaked, but given Tucson’s historical roll as a lagging indicator of national events, we likely still have some improvement in store for us. Locally, I would characterize the office market as still fairly lackluster overall, with some encouraging signs. The most noteworthy is the continued reinvigoration of the downtown core, with a big assist from our young citizens who have decided it’s cool to be there. The news from Caterpillar, which has been widely covered, and to a lesser degree Comcast and HomeGoods, are other bright spots. There is still significant weakness in occupancy for many of Tucson’s older, less competitive buildings, and that includes a few of our mid-rise buildings that have yet to modernize. On the other hand, medical office space continues its upward march.
Elsewhere, I would also say that the Tenant is still in the cat bird seat when negotiating a new or existing lease with the Landlord. Smart building owners want to do everything in their power, and within reason, to keep those tenants, and sign up the new ones. Conversely, there are a lot of office owners who would love nothing more than to sell and get out from under crippling property taxes and deteriorating structures, but have been waiting for improvements in property values, only to see them continue to slump in many cases.
On the flip, flip side, if you’re in the market to purchase something, these are still the salad days because values are still significantly depressed, interest rates are still at historical lows, and the tax laws remain favorable.
We continue to believe that the adjusted vacancy rate is right around 16 percent, which is higher than CoStar’s 12.4 percent published rate through the first quarter of 2016. As for lease rates, we believe that we are between $14.00 and $15.00 for Class “C” space, $17.00 and $18.50 for Class “B”, and between $19.50 and $21.00 for Class “A”. CoStar further tells us that there was net absorption of 172,875 square feet of office space for the first quarter, with a total of five (5) new buildings delivered to the market place, totaling 108,950 square feet. There were no new office properties under construction at the end of the first quarter.
Far off shores (principally BREXIT), ongoing issues with the Chinese economy, and generally low growth worldwide will not provide much impetus for improvement here or nationally. Furthermore, auto sales are down as is manufacturing inventories. Nationally, real GDP growth is forecast to be 1.9 percent in 2016. Many economists are concerned of a pending downturn. We’ve been in a growth cycle the last seven years (some growth cycle), so historically the U.S. is due for a downturn.
I am personally crossing all available fingers and toes with the hope that our world and nation cooperate the rest of the year so that Tucson and Pima County can get back to the business of making this a place that baby boomers will want to retire to (no hurricanes for crying out loud), employers will want to flock to (because the cost of living is very reasonable compared to so many other population centers), and heat waves like the one we just experienced will be a long forgotten memory by the time this report lines some bird cage.
LARGEST LEASES BY AREA
- 35,001 square feet, 97 E. Congress, Caterpillar
- 23,810 square feet, 5055 E. Broadway, Arizona Community Physicians
- 20,000 square feet, 250 E. Toole, Community Bridges
LARGEST SALES BY DOLLAR VOLUME
- $4,600,000, 698 E Wetmore
- $1,970,000, 3935 E Ft Lowell
- $1,914,360, 3900 E Broadway