The Tucson area is expected to add about 7,100 jobs in 2017, so home prices and commercial brokers predict rents for residential and commercial properties will begin a steady rise.
All markets are responding to the long-awaited good news that 2016 brought and forecasts for 2017 are equally positive.
New or expanding retail absorbed more than 386,000 square feet of space in 2016 — a three-year high, a report from Picor Commercial Real Estate shows.
“Service, food and experiential tenants were the most active during the year,” the report said, noting retailers such as Dave & Buster’s, Autobahn Indoor Speedway, multiple theaters and the growth of dine-in movie theaters.
The biggest retail sale of the year was Wilmot Plaza for $47.3 million.
Picor predicts more absorption of retail space this year.
“New construction has been sensitive to the market, catering to pent-up demand,” the report said. “Redevelopment activity in infill locations will increase.”
That activity will require demolition of older strip malls, said Pat Darcy, retail specialist with Tucson Realty & Trust Co.
“This redevelopment and demolition of older retail properties in central Tucson has been a good thing,” he said. “There is too much obsolete retail space in Tucson’s central core.”
Shopping centers will continue to attract nontraditional tenants, Darcy said, such as health clubs, charter schools and medical or dental centers.
Investor interest in Tucson-area apartments has been hot for a while, but if interest rates rise there could be a slow-down in activity.
The average monthly rent in metro Tucson was $688 a month in the fourth quarter of 2016 — a $4 increase from the previous quarter.
Three submarkets — Oro Valley/Catalina, northeast and northwest — averaged rents higher than $800. The lowest rents were reported in Southeast Tucson at $528 and South Tucson/airport at $544.
“Tucson continues to be a seller’s market and many owners are preparing for disposition with fear of rising interest rates and uncertainty surrounding the new administration’s fiscal policies,” Picor said.
Michael Gross, investment specialist with Tucson Realty & Trust Co., said prices for apartment complexes are at record highs.
There were 197 complex sales worth about $552 million in 2016.
“Developers in Tucson are building apartments to catch up on a lull of construction over previous years to take advantage of renter demand and older inventory,” Gross said.
He predicted more multifamily development downtown, but not at the pace of previous years.
“It has to moderate sooner or later,” Gross said.
Restraint in new, speculative construction of office space helped vacancy rates fall to 10.5 percent — a level not seen since 2009.
“Absorption for the year of 410,888 square feet exceeded the prior two years,” according to Picor. The majority of office space was absorbed by medical, behavior health and financial services.
“The pace of activity is expected to continue to accelerate thanks to optimism from all stakeholders fueled by both internal expansion and external interest in the Tucson office market,” Picor’s report shows.
Medical space is expected to lead the way in 2017, followed by legal and financial services.
“Not only have we bounced off the bottom of the greatest recession since the Great Depression, but there is a renewed momentum to the market that hasn’t been seen or felt for years,” said Doug Richardson, office specialist with Tucson Realty & Trust Co.
He said downtown continues to be a bright spot in Tucson’s office sector and investors are talking about more than 400,000 square feet of central business office development this year.
Tucson’s industrial market had its strongest annual gain in occupancy since 2006, says Picor’s report.
“With occupancy above 92 percent and no speculative space under construction, the market will experience upward movement in rents,” the report shows.
Industrial activity is the result of local companies expanding, construction suppliers returning and Phoenix firms opening branches in Southern Arizona.
“In the year ahead, fewer lease concessions are expected and more rent increases throughout the Tucson industrial market,” Picor’s report says. “Growth in the e-commerce sector will continue to benefit warehouse and logistics space, and job growth in the region will fuel further demand for commercial real estate.”
Strong sales that began last year will continue in 2017 with possible new construction, said Chuck Blacher, industrial specialist with Tucson Realty & Trust Co.
Last year there were about 17 sales valued at $38.7 million — the average square foot price was $56.31.
Blacher said there were 159,971 square feet of industrial space under construction at the end of the year and vacancy rates dropped to 7.85 percent, compared to 9.2 vacancy rate in the first quarter of 2016.
Major employers announcing big hiring plans propelled homebuilders to all-time high permit levels last year.
“An additional benefit that is hard to quantify is the number of supporting vendors and businesses that will follow these larger corporations to Tucson,” the Chapman Lindsey Commercial Real Estate Tucson Land Update report shows. “With these job announcements attitudes regarding the economic outlook of Tucson are now extremely positive, a near 180 from just a year ago.”
The 2,699 single family resident permits issued last year represented a 24 percent increase over 2015.
But homebuilders bought less lots in 2016 than the previous four years, Chapman Lindsey noted.
“While this lower number of lots purchased should not impact 2017, it may start to impact 2018 and beyond if builders and investors do not increase their land purchases and lot development going forward,” the report said. “The current strong economic outlook should bolster confidence and we should see more deals being done this next year.”