Tucson Real Estate Investment Market Midyear Report
by Mike Gross
The Tucson Real Estate Investment market is starting to rebound in 2016 with the Stock Market coming back and investment money starting to show up again. The stock market, which is a pulse of the nation, hit 18,000 and continues to hover just under that benchmark, but still seems to be very volatile. In the last 3 months, it has regained the 10 percent loss realized in the First quarter of the year, which I honestly believe was in part due to the interest rate increase by the Fed in the Fourth quarter of 2015. Another positive for the consumer has been the continued low prices for gas, giving more disposable income to most. Oil continues to be down approximately 60 percent from 2014 highs. Another positive is that the interest rates for purchasing homes and investment properties have remained low creating an increased home purchasing in Tucson. Home sales the first half of this year are up significantly over last year. That said, the unemployment number of 4.7 percent is questionable because of people not actually working in their trained professions and others that can’t find jobs leaving the job market. There are 97,000,000 people that are employable, but have quit looking for work. Only 35,000 jobs were gained nationally in May and the GNP was revised downward two percent for the period of 3rd quarter 2006 through 2015, much of that revision occurring the last seven years. Wages are stagnant, hiring is slowing as is business investment. America’s factories remain weak and corporate profits are under pressure. All classic signs of a pending economic downturn. The news regarding the economy is not encouraging.
Regardless, Tucson has received some good news lately with the entry into the market of a division of Caterpillar with 600 jobs, keeping the A-10 at Davis Monthan for the time being (thanks to Congresswoman Martha McSally’s efforts), the new Hockey Farm Team to be located here and the re-entry into the market of a college bowl game, the Arizona Bowl. Job growth recently for the region has averaged 2.8 percent, equating to 10,400 additional jobs compared to 2,900 positions created last year for the same time period. However, Tucson has only recovered 75 percent of its jobs since the recession, while Phoenix has returned to its pre-recession levels. Population growth increased 0.4 percent and is expected to increase 1 percent in 2017.
In addition, Tucson was rated as one of the hot spots for Millennials over the next 5 – 10 years. Furthermore, Governor Ducey has been very focused on creating job growth here in Tucson as he and his staff were very instrumental in bringing Caterpillar, Comcast and Uber to our community. We haven’t had that kind of strong support from the 9th floor in eons. All of this is very positive news for Tucson and much needed.
The above has an impact on Tucson’s investment market. For the buyer and seller, values are moving higher, but it is deceiving at times. While cap rates are low, there are still some deals out there. For example, Industrial real estate has 10-year lows in vacancy, but industrial land can easily be purchased for $1.50 per square foot in many areas. Effective office rents are still lower than they were pre 2008, but there are office properties selling at 8 percent caps and lower. We just saw a 15,000 square-foot tenant get a 10-year lease deal, with over $35.00 per square foot for improvements, a lot of free rent, a 7.5 percent brokerage fee, a ton of free parking and a lot more. That is an effective rate of approximately $17.00! Another deal was a sublease of approximately 13,000 square feet where the sub-landlord is subsidizing the deal at about $12.00 per square feet for the next 4 years. Because of the rate that the sub-landlord is currently paying, the property should sell for approximately $154.00 per square foot even though it is 9 percent vacant. So, investments are a juggling act, meaning what is more important, now or betting on the future. That really depends on the investor, though Tucson seems to have some positive momentum.
In regard to office sales for buildings over 10,000 square feet, there were 13 transactions the first half of the year for a total dollar volume of $10,990,527 according to CoStar. The average sale
price was $1,570,075 with the largest sale going to Wetmore Office Plaza for $4,600,000 (32,040 square feet).
It will be interesting to see what happens in the Tucson Retail Sector by the end of the year due to the loss of Don Baker with Larsen Baker and the 60+ retail sites they own. According to CoStar, there were 8 sales of retail centers greater than 30,000 square feet with a dollar volume of $7,393,539 and an average price of $1,843,385. Two notable transactions were: Shoppes at Rita Ranch for $17,281,759 and La Cholla Plaza for $4,868,539.
Apartments have been the king and leading the investment market. They are continuing to see cap rates at around the mid 6 to 7 percent range with some recent transactions around 5.6 to 5.75 percent. Unheard of, but in a low return market, investors are chasing yield, which is the return on investment over a long term. That sector of the market is still strong because there has been little development due to of the lack of employment/economic growth, and the lack of quality apartment sites; therefore, vacancy is in the 8 – 9 percent range for older product and any new product (not out in the sticks) has leased up very well. Lead by a strong first quarter, there were 41 closed transactions for communities 25 units and up with a total dollar volume of $223,583,714 according to CoStar. The average price was $6,388,106. Notable transactions include:
- Harrison Park (252 units) for $30,800,000
- The Overlook at Pusch Ridge (784 units) for $29,250,000
- Park Place (365 units) at $28,775,000
- Galleria Del Rio (101 units) for $19,300,000
For certain real estate product types (homes under $300,000, private student housing on campus, apartments and self storage) it is a seller’s market as cap rates are at record lows (great for sellers). For investors who wish to dispose of assets, it may be your last chance to maximize value before cap rates begin to rise with interest rates forecasted to be raised by the Fed.
In conclusion, as we mentioned last time, real estate investing advantages have been location, location, and location along with buying and selling at the right time. Another advantage is income or appreciation or both during holding periods. Real estate offers the depreciation for tax shelters for your income. And the final advantage is equity buildup each and every time you pay your mortgage. Today, critical choices (buy, hold, or sell) have risk. If you have been a holder of real estate, now is probably the time to harvest your gains before cap rates rise as they usually do when interest rates increase, which they are forecasted to do. If you’ve been looking at buying a building for your business, now may be the time to buy as Tucson’s real estate economy is at its healthiest since 2008, most sector values are rising and interest rates are at near record lows.