Although Tucson rests in the middle of the Sonoran desert, the city’s rising tide is expected to continue raising all boats, at least when it comes to the commercial real estate market in Southern Arizona.

In their 15th annual industry recap and forecast, members of the Tucson area chapter of the CCIM, commercial real estate’s networking and educational association, heard from last year’s winning forecasters and additional industry experts. The forecasters said that while some factors weighed against the market, Tucson’s continuing influx of residents will keep all sectors booming for the indefinite future.

Noting that the CCIM conference attracted almost 400 participants for this year, a record for the Southern Arizona chapter, 2006 president Mark Biery said, “This is testimony to both the strength of the market and the level of interest in it.”

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Macro-economic events affect everything, said 2005 appraisal forecast winner Michael Naifeh, principal of MJN Enterprises. “In Tucson, our drivers start with the housing market, and while housing starts here are high in relation to the number of new residents, as compared to other cities, loan service costs in relation to individual debt remain low, indicating that there’s no risk of a housing bubble.”

What the city’s housing numbers do point to is continued pressure on construction costs and land prices, which will push up apartment prices, put a premium on retail space nearest the new housing and more demand for offices and industrial property.

“When 2004 was the hottest market on record, nobody expected 2005 to be even hotter,” said Bob Benedon, accredited land consultant with Long Commercial Realty. “We normally average about 2.5 people per house. If you look at the 28,000 people who moved to Tucson in 2005, a total of 11,200 homes were sold to meet their needs. That means 1,000 homes were sold to meet speculator demand, but even with these homes back on the market, I would still predict 10,327 new homes sold in 2006.”

That total also subtracts the potential purchasers of condominium conversions. With between 2,500 and 5,000 of them planned, mostly for the Catalina Foothills, they will make their mark, Benedon said.

Beyond Tucson, he said even more sales are likely outside of metropolitan boundaries as the city’s growth continues on the periphery in Catalina, south on I-19 and beyond Vail into the Benson area. “As office and home builders compete for land, we could continue to see that outward pressure with 500 homes sold, this year alone, in Cochise County.”

Another result of the home sales, themselves, has been fundamental changes in the development process, said D.R. Horton’s Tucson Division President David Greenberg. He said the growth of the city and changes in accounting rules mean developers are more likely to acquire unimproved property than take option on it. “We’re closing on the land at the preliminary plat, rather than waiting until the final plat.”

He said booming sales, which have left real estate developers with a lot of cash, mean there’s more to spend on future land inventory. Combined with post-Enron accounting rules that mean land development work “goes on the balance sheet whether we own the land or not, we feel we might as well own it.”

As for the condominium market, developer Christopher Sheafe, principal with C. Sheaf Corp., said it’s no longer about price. Along with the Catalina Foothills, Scheafe said a total of 1,266 condominium units are planned for downtown.

“More residents are choosing the option,” he said. For the first time, this group includes those who prefer single-family attached to traditional single-family residential. “They prefer the controlled access and the various amenities that the former apartment complexes offer.”

Despite competition from the condominiums and people priced out of the market by increasing home costs, Scheafe said, “I would forecast a fantastic year for the industry in 2006, and 2007 could be better.”

By comparison, the market for multi-family housing will continue to be constrained by a lack of available land and capitalization rates less than mortgage rates, said Art Wadlund, a founding partner of the commercial real estate company Hendricks & Partners. Condominium conversions have pushed up per-unit prices and slashed the available inventory, but comparisons between rents in Albuquerque and Las Vegas and household income demonstrate that rents remain lower. “So, there’s still a lot of room to raise them.”

Wadlund called the apartment market “a perfect storm” for buyers and sellers. “There’s no where to go but up, which means things are just going to get better and better.”

Keeping pace, retail and office markets are also headed upward, but only in the right sub-markets. Downtown Tucson retains its 15-year inventory of available space, and retail or office space in older areas isn’t attracting the same interest from tenants, said Rob Gillette, president of Gillette Commercial Inc. “The retail vacancy rate is 8.2 percent, the lowest since 1988, with the lowest vacancies following the rooftops,” he said. With master-planned communities becoming the standard, “developers are answering with better design, meeting the increasingly more local needs of the tenants.”

They’re also working to meet municipal government demands for designs that fit into the community setting and attention from national retailers. “As the city approaches a million in population they’re looking at Tucson with new eyes.”

Examining the status of the finance market and mortgage rates, Eric Lamb, business development officer for last year’s winning Wells Fargo Bank, said the decade-long relative stability of premium mortgage rates will continue, even as they climbs to 6.35 percent. The only thing that will change is the amount of cash available for loans, which should tighten as investment returns to the stock markets, “and this will benefit the commercial real estate market by making investors shift back to looking at market fundamentals.”

Contact Philip S. Moore at pmoore@azbiz.com or at (520) 295-4238.