Inside Tucson Business: Real estate mood could shift from worry to wonder

Real estate mood could shift from worry to wonder

By Philip S. Moore, Inside Tucson Business
Published on Friday, August 11, 2006

A few years from now, people will be wondering why Tucson’s real estate industry was concerned about the future.

That’s the forecast of retail specialist Pete Villaescusa, first vice president CB Richard Ellis Tucson. He, along with office specialist David Volk, industrial specialist Bill DeVito, operations manager Don Ahee, and CEO Tim Prouty, offered CBRE’s mid-year analysis and forecast.

Retail, industrial and office vacancies are all under 10 percent, said Prouty. “That’s the first time in my experience I’ve seen that.”

Suggestions the commercial market may be cooling off don’t hold up, Prouty said. The one thing that may be holding things back is the lack of product, “but the demand is there.”

Industrial outlook

Ending a quarter-century of oversupply following the divestiture of the late Howard Hughes’ real estate holdings around Tucson, a combination of factors has turned the tide in Tucson, slashing the vacancy rate for industrial space to only 7.78 percent, the lowest level in five years.

Large formerly vacant buildings have now been leased by the likes of Pella Windows, Macsteel Service Centers and Glass Fiber Inc., DiVito said and improved industrial land has dwindled to record lows.

“Historically, we’ve had an abundance of industrial land. In the early to mid 1980s, we had about 30 years’ supply of improved industrial lots,” DiVito said. Now, “there’s no land,” because much of it is being gobbled up by residential home builders buying large tracts for subdivisions, including in areas once thought to be destined for industrial uses, such

as near Tucson International Airport.

Lease rates have been driven upward by the lack of industrial buildings. Where the cost per square foot used to be $2, “we’re now averaging $3.50 per square foot, and, in some more desirable places, it’s $7 per foot,” he said. “It’s amazing how quickly the situation changed.”

Looking to the future, DiVito said its possible Tucson could lose out on relocations.

“They may want to come here, but locate in Apache Junction or Albuquerque because they can’t find a 100,000-square-foot space,” he said.

Office outlook

Rather than relocations, “organic growth” of local companies is what’s causing the supply of available office space to dry up.

“It used to be that every time we got the point where someone might think about building, somebody else would move out of a large space,” Prouty said. “It’s different now.”

Growth of local companies is swallowing available space and pushing net absorption rates to 130,000 square feet, or nearly twice the 68,000 square feet of space under construction.

“Right now, there’s a slew of office users in Tucson in 10,000 to 20,000-square-foot spaces and they’re squeezed,” Volk said.

With a vacancy rate of only 8.96 percent, far below the nearly 14 percent recorded during the fourth quarter of 2003, lease rates are also headed higher, averaging $21.37 per square foot.

Now it’s a “landlord’s market,” Volk said, even large office vacancies don’t stay on the market.

“Misys is vacating 180,000 square feet and AOL has 50,000. Right now, my understanding is the at 60 percent of the Misys space is already pre-leased. By the time they actually vacate, the expectation is that all of the space they’re leaving will already be leased,” he said. “There are many companies, local companies, that are bursting at the seams and ready to make the shift to larger space,” but there isn’t enough space for lease. The beneficiary of this will be owners of older buildings, who offer an alternative to paying the high construction costs for office condominiums and free-standing buildings. “These Class C and Class D buildings are seeing the benefit of improvements because people prefer them.”

Retail outlook

When it comes to retail space, the vacancy rates rebounded from an eight-year low to 8.7 percent, but the present isn’t the future, said Ahee. In Sahuarita, he said, the relocation of Wal-Mart to a new super center building created a major vacancy, but continued construction of shopping center and a free-standing big box space to meet demand by national retailers should push the vacancy rate back down. Even the lower disposable income of new home buyers in suburban areas won’t hold the retail expansion back.

“In the 1980s, there was more disposable income in the South Tucson area than the area around Ina and Thornydale, because of high mortgage payments,” Ahee said. “It’s amazing how fast that changed.”

Because retail is the highest-yield option for commercial construction, developers build when the right number of “rooftops” are completed, he said. Then they wait for income to catch up.

It’s the same story for the retailers, themselves, Villaescusa said. While there may be a shakeout as some retailers decide they’ve overbuilt, there will be others to take their place. “Meanwhile, retail construction will continue to follow residential construction to the northwest, southwest and southeast,” he said. “Everything is tracking pretty much as expected.”

E-mail comments for publication to editor@azbiz.com. Contact Philip S. Moore by e-mail at pmoore@azbiz.com or call (520) 295-4238.

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