The market for office space in Tucson is beginning to show signs of new life, according to Mike Gross, office leasing and investment specialist with Tucson Realty & Trust Co.

New office development has slowed a bit, Gross says, but some kinds of office space seem to be picking up, especially in the areas of medical or medical-related businesses.

The 100,000 square feet vacated when First Magnus shut down and went bankrupt in August 2007 has been absorbed this year, Gross said. An additional 40,000 square feet of office space also was absorbed in the first half of 2008.

He attributes the increased activity to the continued demand since the metro area topped 1 million population that has sparked "some very strong rumors about some larger firms coming and growing in Tucson."

At Tucson Realty & Trust Co.’s mid-year review, Gross said office space vacancy is now in the high 10 percent to 11 percent range and he predicts the rate will be down closer to 10 percent by the end of this year.

"Tucson is now a big city. Because of that, we will see more national and regional developers/users come to our market, although not necessarily this year," Gross predicted.

Office rental rates are higher now than they were five or six years ago when there was an office construction boom featuring small "build-to-suit" units. Gross predicts those seeking to lease office space six months from now won’t see the concessions from owners that they’re getting now, so he said now is the time to renegotiate leases and to find new office space.

One down note in the office market is that those seeking to refinance office purchases will probably have a hard time doing so. He said owners of properties with decreasing values and high loan-to-value ratios may get a visit from their lenders asking for an infusion of money to protect the lender in case there are cash flow problems.

After a strong 2007 that saw industrial space vacancy rates drop to as low as 6.5 percent, the market is slowing down, according to George H. Amos III, president and chairman of Tucson Realty Trust Co.

Amos said industrial vacancy rates are now at about 12 percent, which he said is "a more normal market." Amos said the market in 2007 was so tight there wasn’t much supply. He predicted rates won’t rise as much this year. Mining, biotech and solar industries have helped keep up demand for industrial property, he said.

In retail, the first half of 2008 saw the biggest additional of space in the area in more than 10 years, with nearly 2 million additional square feet coming on the market, compared to an additional 200,000 square feet last year, according to Rita Perez, retail specialist at Tucson Realty & Trust Co.

With home sales down 25 percent, national retailers are delaying plans to enter the Tucson market but activity will still outpace national levels. Second-quarter retail vacancy rates will be about 8.5 percent and rental prices will be "all over the board," ranging between $15 and $20 per square foot while new construction will bring $25 to $30 per square foot.

Contact reporter Ed Egger at eegger@azbiz.com or (520) 295-4238.