What to watch for? The most substantial global supply chain shift that the world has ever seen. Stay tuned…………….I am seeing some wild moves due to tensions with China and COVID supply chain delays
 
 
Arizona as a whole outpaces the rest of the country by far when it comes to unemployment rates, economic growth and real estate activity. Migration patterns continue to favor Arizona as residents migrate to Arizona from densely populated cities and states. Reasons for migration include COVID, real estate prices, taxes, regulations and climate. As this mass migration continues, the demand for the residential market continues to stay very strong. This demand is fueling the industrial market as residential developers spur more demand for industrial supply houses and trade related businesses.
 
The demand for office and retail nationwide and especially in densely populated cities will decrease substantially. The demand for office and retail in Arizona, Colorado, Utah, Kentucky, Tennessee, Texas, and Florida will remain steady without noticeable increases or decreases as the migration demand will offset the COVID effects on office and retail. We would also expect new retail development due to the quickly changing world of retail. Drive through developments for retail will increase and last mile will begin to pop up more in retail projects as DoorDash leases their first Tucson last mile distribution location and Amazon continues to expand, spurring other retailers to compete and sign new distribution related leases. I would expect the large big box retailers including home improvement and grocery stores to start leasing distribution spaces to adjust and compete with Amazon, GoPuff, and DoorDash. Rumors of Amazon taking over JC Penney locations may be foreshadowing for last mile distribution.
 
The Downtown Tucson market as a whole seems to be hit the hardest as restaurants and bars face shut down procedures. The loss of income will have to be mitigated through rent structures and mitigation between landlords and tenants. We would expect the vacancy rates for office and retail downtown to increase and will take a few years to get back to 2019 levels. This recovery will be directly related to consumer confidence in dine in eating and whether or not office employees decide to work from home or the office. The industrial market downtown felt some losses but has since been filled up from northwest demand that cannot be solved with limited Northwest supply.
 
Another trend that I’ve noticed is the baby boomer generation retiring. Lots of baby boomer business owners have been phasing out of the business for years but have not officially made the move. I met with 3 different business owners last week that have decided to shut their businesses down and sell their buildings. They’re reason for shutting down is COVID. COVID hasn’t affected their income but the stress and shifts have spurred these business owners to move on to the next phase of life, retirement.
 
Tucson Demand Predictions:
Residential: Up
Industrial: Up
Office: Down but not by much
Retail: Down but not by much
 
Tucson Supply Predictions:
Residential: Up
Industrial: Up
Office: No change
Retail: Up 

COVID has fast tracked the already trending direction of retail sales while online sales increased 30% in the first half of 2020. Many big box retailers struggle to stay ahead of the trends as rumors emerge of Amazon taking over JC Penney locations nationwide for last mile distribution purposes.

Even conventional grocery stores have put their new leasing activities on hold while Whole Foods, owned by Amazon has ramped up. Doordash just announced it’s first distribution location in the Tucson market. Other direct to consumer distribution models such as GrubHub, GoPuff and WholeFoods on Amazon Prime have grown massively since March. I feel we will only watch this trend grow steadily as retailers realize they can cut their rent in half by moving to an industrial building and even cut out some of the service headaches that are involved in the food business.

In other recent news, Walmart has announced Walmart Plus, a last mile distribution service similar to Amazon Prime https://www.nbcnews.com/shopping/lifestyle/what-walmart-plus-n1239895. We would expect other retailers to follow by leasing distribution building or even retro fitting retail buildings that are more centrally located for last mile distribution.

This increase in distribution space demand has spurred new activity in the industrial market. We can expect to see new spec industrial construction come to Tucson to satisfy the demand for distribution space. When distribution tenants are in the market looking at spaces they are typically looking for 30’ clear height plus, ESFR sprinkler systems, minimal office, close proximity to I-10 and the airport, and plenty of dock positions.