No matter how they play their game, about 400 of the Tucson region’s specialists in commercial and investment real estate, came away from the 17th annual Commercial Real Estate Market Forecast Competition mostly expecting the worst, at least for this year.

There were some areas that won’t be hit as hard - namely industrial and maybe retail - but the general consensus was the slowdown will affect Tucson through all of 2008.

Comparatively, though, the downturn will be quicker and less severe here than other places, such as Phoenix.

Jim Rounds, senior vice president and economist with Elliott D. Pollack Co., in his luncheon keynote talk forecast the Tucson region is poised to come out of the downturn in about two years but it will take three to five years for the Phoenix area to recover.

He attributed that mainly to the fact that the Tucson housing market didn’t get as overbuilt as in Phoenix during the peak year of 2005.

The annual competition put on by the Southern Arizona CCIM - Certified Commercial Investment Member - Chapter where specialists test their prognostication skills on a variety of marketplace indicators. At the end of the year, the forecaster whose prediction most closely matches the actual number is declared the winner.

This year’s forecast competition was held at Loews Ventana Canyon Resort March 18, the same day the Federal Reserve cut interests rates another ¾ of a percentage point. The central bank has now cut rates by 3 percentage points since mid-September. Additionally, it will provide about $400 billion worth of liquidity in an effort to get credit markets moving again.

But to hear those at the CCIM forecast competition, the biggest challenge to getting Tucson moving again lies in consumers regaining their confidence to start spending.

In his speech, Rounds said 70 percent of the economy is tied to consumer spending.

Building permits

This is the gauge the CCIM competition uses to measure the health of the land sale business. Two out of the three forecasters said the number of building permits issued in 2008 will be fewer than 4,000, less than half the number issued in any year between 1998 and 2006.

James Marian, of Chapman Lindsey Commercial Real Estate, was the least pessimistic but he still forecast a decline to 4,350 permits this year, down 22 percent from 2007. He said he expects land prices may decline further in 2008 but will level off by the end of the year.

David Greenberg, president of D.R. Horton Home’s Tucson division, said one of his challenges is keepinig front-line sales people energized in the face of national publicity.

"We’re still selling houses," he said. "It’s not the numbers we’ve had in the past but we’re still selling houses."

Industrial

This is the brightest spot on the local commercial real estate market. While that’s good news for people in the real estate business, it’s not so good for people trying to spur on economic development and finding a dearth of places to show businesses considering relocation.

Rob Glaser, of Picor Commercial Real Estate Services, said Tucson now ranks third, behind San Francisco and Los Angeles, for having the lowest vacancy rates among the nation’s largest markets. David Blanchette, of Bourn Partners, said the supply of finished industrial space on the market amounts to about a two-year supply.

The biggest challenge for the Tucson market is finding larger industrial facilities.

The Rockefeller Group, which last year acquired 20 acres in the Airport Commerce Center, is due to break ground this year on a 520,000 square-foot industrial building on the site.

As for the kinds of industries, Glaser pointed to solar-related firms who are aggressively acquiring new spaces.

Despite the shortage of industrial space, the overall sluggish economy will contribute to slightly increasing vacancy rates this year.

Multifamily housing

With the downturn in the residential home building market, some might think there would be more demand for apartments. Not so, said the experts.

There are two major issues facing the multifamily housing market in Southern Arizona: the state’s new employer sanctions law that has driven people out of the state and the number of single-family homes bought by investors unable to flip them and are now renting them to try to recoup some of their money.

"Regardless of how you feel about the employer sanctions law, it is having it’s intended effect," said Bob Kaplan, of Picor Commercial Real Estate Services, who said people are self-deporting themselves.

Kaplan, Mike Chapman, vice president of CB Richard Ellis, and Lance Parsons, of Re/Max Catalina Foothills Realty all said the employer sanctions law is having a significant effect on apartment rentals on the southside and in Hispanic neighborhoods.

Office space

Office space is now at the highest vacancy rates in the last four years. Contributing to that was last year’s collapse of First Magnus Financial Corporation, which threw even more vacant space on to the market. The consensus forecast for this year, is that the vacancy rate will continue to increase.

There will be exceptions based on location and quality of buildings but, the general trend will be for lease rates to stay flat this year because building owners don’t want to see tenants leave. While there will be select premium office spaces capable of getting lease rates at $30 per square-foot, the norm for Class A properties will be in the $22 to $26 per square-foot range, and Class B and Class C properties will get between $16 and $22 per square foot.

Further, owners are increasingly offering concessions to keep tenants and attract new ones willing to sign leases for five to seven years.

Purchase by owner-user office buildings, generally professional offices, will be tempered this year due to difficulty in securing financing.

Still though, capitalization rates are generally in the 6.75 percent to 7.5 percent range with some high-quality properties commanding premium rates that could put that as low as 6.25 percent.

Retail

Spoofing a political TV commercial for Hillary Clinton, Greg Furrier of Picor Commercial Real Estate Services, said "It’s 3 a.m., the phone is ringing. It’s your retail manager and another tenant cleared out his store at midnight. And this time they took the door with them."

Nancy McClure, first vice president of CB Richard Ellis, said where retail "used to be a landlord’s market, now it’s a tenant’s market."

While vacancy rates for retail have been among the lowest in the Tucson commercial real estate market, the old "retail follows rooftops" scenario of a slowdown in the number of rooftops coming on the market, means retail will feel the pinch.

Still though, Furrier, McClure and Craig Finfrock, of Commercial Retail Advisors, all agreed that retail will weather the slowdown better that most other commercial real estate.

To some degree, retailers have only recently began to catch up with the explosive growth of residential earlier this decade.

Finfrock noted that grocers, in some cases, are beginning to slow down previously announced plans for new stores, particularly in the northwest and Marana areas.

Geographically retail vacancy rates range from a low of 2.2 percent on the westside to 9 percent in the central area and 9.25 percent on the northeast side.