Q2 2012 Tucson, Arizona Office Market Trends

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Q2 2012 Tucson, Arizona Office Market Trends

A sense of stability. Despite limited “meaningful” job creation—”the largest hurdle” now facing the market, according to an August report by Cushman & Wakefield/ PICOR—and “uncertainty” in the health care sector, the market has “settled into a sense of stability that signals firming fundamentals and a somewhat painfully slow return to… balance.” Reis’ data reflect the observation. Net absorption of competitive general purpose, multi-tenant space through the first half of 2012, alongside no newly delivered supply, was 59,000 square feet. While the total for second quarter alone was only 9,000, demand has picked up since: the two-month period July-August followed with positive net absorption at 36,000 square feet. “Lease activity was dominated by renewals and relocations to upgrade quality of space and location,” an executive with PICOR Commercial Real Estate Services informed Inside Tucson Business in August. “Often, those were downsizing moves to more efficient space, driven by technology and reduced head count or consolidation.”

Vacancy, in any event, has been on the decline. At 14.3%, the rate for the second quarter was down 10 basis points from the quarter before and was down 180 points year-over-year. While rents stumbled slightly earlier this year, second quarter brought the return of growth. At $12.46 psf and $17.12 psf, asking and effective averages for the period were up 0.1% and 0.2% from the quarter before and were down 0.2% and 0.1% year-to-date—following respective gains of 1.4% and 1.1% all told last year. The favorable performance that followed in July and August lowered the vacancy rate to 13.7%, while each average rent saw an additional small loss.

Construction of standard for-lease office space is minimal. The FBI occupied a newly completed 84,350-square-foot build-to-suit headquarters at 275 N. Commerce Park Loop in March and a 100,000-square-foot office-condominium project is under construction at E. Tangerine and N. Oracle roads for completion in April 2013. No other office projects of any description were underway as of September. A new development cycle will be slow to form. Long-term development planning includes 303,000 square feet of office space at the Passages of Tucson mixed-use development planned for a 300-acre site at I-10 and Highway 83 in southeast suburban Vail, AZ. “As office markets in larger western cities continue to improve, those gains should spill over into Southern Arizona,” reports Inside Tucson Business. As a third-tier city, “decisions affecting the local market here will be made after companies take care of their first and second tier operations,” an associate with Tucson Realty & Trust informed the source.

Reis expects to see vacancy in the vicinity of 14.0% at year-end; rent growth below 1.0% is projected for the year. The year 2013 should be moderately stronger.