The summer of 2023 felt like 2018, activity was slower and less transactions were closing. I attribute the lack of transactions to increased interest rates, stubbornly high construction costs, and less confidence from tenants and buyers. Despite a sluggish summer, vacancy rates remain historically low. Vacancy in spaces less than 30,000 SF is the lowest and most of the time, a tenant or buyer is not able to lease or buy the space that they are looking for. Q4 has been incredibly strong, similar to 2021-2022 levels of activity and we feel a strong wave of demand entering the market.
We expect vacancy to remain at record lows (sub 3%) during 2024 despite some aspects of the macro economy slowing. With major companies breaking ground on projects in Tucson like America Battery Manufacturing and Becton Dickinson, we expect more ancillary businesses to expand and/or move into the Tucson market, absorbing more space. While there is some speculative construction, there is not enough, especially for bays less than 50,000 SF. When we look at the Tucson vacancy rate, the majority of vacancy is with bays larger than 100,000 SF and all it takes is a few tenants to fill those vacancies and we will reach a vacancy rate less than 2%, possibly less than 1%.
2024 construction will occur mostly in the Airport and Vail market as those markets have available land and increased growth from both residential and industrial construction. The Northwest and Marana market will continue to see high lease rates, especially in flex markets. There is a need for more industrial land in the Marana market and as ag land gets re-zoned, we may see more industrial opportunities.
There have only been a handful of speculative projects with bays less than 20,000 SF and they have all been successful despite construction delays, rising construction pricing, rising interest rates and persistent labor shortages. Right now we aren’t seeing any beginning stage flex projects being built, mostly due to construction pricing and labor shortages. We expected interest rates to pose a bigger threat but the cost to build is the biggest challenge in Tucson.
There is money out there ready to build but it is tough to make the numbers pencil out with all time high construction costs and wage inflation. Lease rates have increased substantially over the past few years, even passing the $1.00 NNN mark but they will need to increase even more. I’m seeing demand for flex space in every part of the market and think the key to a successful speculative flex project is to have a retail component to get lease rates north of $1.60 NNN.
I expect user building prices to remain strong and even increase during 2024 as available buildings continues to remain low while demand remains strong. I think $100+ per square foot for user buildings is here to stay and buildings with industrial outdoor storage commanding prices north of $120 per square foot. If I were to build the perfect user building in 2024 it would be a pre-engineering metal building around 10,000-20,000 SF on at least an acre with minimal office. There are plenty of tenants and buyers out there looking for a 10,000-20,000 SF stand alone building with close to nothing available.
We expect 2024 investment sales to remain low as investors can’t make 2021 prices pencil with 2024 interest rates. In addition to rising interest rates, banks are tightening their lending. The 2024 reality is that banks will have less to lend out and they are much more conservative. Access to debt will also create headwinds for construction.
2024 will continue to be a K shaped recovery both in the economy and real estate. Some aspects of real estate are feeling pain, like office and multi-family, while others are stronger than ever, like flex. We have seen more businesses file for bankruptcy or get locked out but the spaces backfill quickly and most vacancies are appearing in class c product. The businesses that we have seen struggle are businesses that have struggled from lack of skilled labor, access to materials or struggles to raise pricing. The reality of this new economy is that everything is more expensive and businesses need to raise their pricing or they are going to go out of business.
Some of Tucson’s economic tailwinds that will continue to push rents up are; mining, on-shoring, distribution, and residential and industrial construction. As these four catalysts have a bright 3-5 year future, we expect flex, IOS and industrial vacancy to remain low while lease rates increase. Meanwhile, three re-development projects are set to demolish around 200,000 SF+ of existing class b, flex buildings. We expect continued strong demand while existing supply is set to be demolished which will push lease rates higher. Less supply, more demand, and higher pricing will be the theme for 2024.
Single tenant building with heavy 480V power, 100% air conditioning and dock and grade loading. Located near the Airport, I-19, and I-10 offers convenient access and close proximity to Tucson’s major employers such as Raytheon, Modular Mining, Universal Avionics, and many others.
This building lends itself to many subtypes of industrial (flex, distribution, R&D, manufacturing, and warehousing) with a sprinkler system, 18’ clear height, I-1 zoning, and a mostly warehouse floorplan.
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One year ago, industrial land was selling to developers like hotcakes. Today those developers are struggling to make development pencil out. While lease rates have increased and vacancies are at an all-time low, the cost of building has also increased. Some developers have paused speculative projects. This stagnant supply and strong demand dynamic are creating challenges for tenants, brokers, and developers. Transaction volumes are considerably less than what they were one year ago as tenants and buyers can’t find available space and interest rates have grid-locked the investment side of the market.
A separate but related concern throughout the market is the increase in NNN expenses. Insurance rates are increasing across the board, taxes are increasing, and maintenance costs are increasing. Persistent labor challenges are also driving the costs of..............
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3740 E 43rd Pl sold for $1,090,000
Max Fisher, BRD Realty handled this transaction
Washington Inaugural Properties LLC purchased the 10,000 SF warehouse from RICMICNIK LLC
Pascua Yaqui Tribe purchased a 3,680 SF trucking terminal on 2.95 acres from CDR Leasing LLC for $750,000
Max Fisher, BRD Realty represented the seller. Veronica Robles, Homesmart Advantage Group represented the buyer
1615 W Grant, a 7,200 SF warehouse was leased to Better Box LLC. Max Fisher, BRD Realty handled this transaction. The landlord was Rodgers-Hoge Partners.
2,130 SF of warehouse at 8101 E Research Court was leased by Tony's Tuning and Specialties LLC. Max Fisher, BRD Realty handled this transaction. Research Investors LLC was the landlord.
1,000 SF of warehouse at 2112 N Dragoon Suite 19 was leased to Seven Eleven Customs. Max Fisher, BRD Realty handled this transaction. the landlord was Rich Rodgers South Inc.
1,700 SF of warehouse at 50 W Fort Lowell was leased to Zachary Jones. Max Fisher, BRD Realty handled this transaction. the landlord was R Legacy Irrevocable Trust.
The fed is aggressively hiking rates, residential rents are starting to drop, and residential sales are slowing. Sellers are losing leverage slowly. Pulte just cancelled $800,000,000 in land acquisitions and lost $24,000,000 in earnest money deposits, but it’s still difficult to find a rental or a decent home that isn’t a new build.
Industrial vacancy is at an all time low, construction is at an all time high. If you’re an industrial tenant or buyer, good luck finding a building or land. Price per square foot for industrial has come close to doubling just within 2 years. Industrial rents are still increasing but at a slower pace compared to 2021. Available entitled industrial land is sparce. Ag land in Marana is being re-zoned to industrial.
Amazon has put most of real estate expansions on hold while the brand new 200,000SF+ warehouse at Ina and Silverbell is still TBD. The stock market is starting to ripple into the real estate market with Meta announcing 11,000 layoffs and a pull out of the largest office lease in Austin.
Construction costs are continuing to increase despite raw materials dropping. We can most likely attribute increased costs to the increase in trade wages and fuel/energy. Wage inflation typically lags. Supply chain disruptions seem to be evening out overall.
Jerome Powell’s last speech didn’t indicate any slowing of rate hikes in the near future. Rate hikes are freezing capital markets and we can expect cap rates to adjust upwards.
October’s inflation rate was announced this morning at 7.7%. This is great news as inflation dropped .5% month over month. Maybe Powell will pivot in 2023. This good news has the Nasdaq up 5.79% so far today.
Office seems to be slow and lame, especially Class B, C and non-medical space.
In June, a client sold a 7 unit office complex for $70 per square foot and traded into an industrial/flex park for $80 foot.
The same client converted an old shopping center into small bay warehouses and now there’s only one vacancy at this former shopping center. The tenants that leased the warehouse conversions are gyms, contractors, Ecommerce businesses, and an after market auto related business.
Retail is a mixed bag with big box looking lame while PADs, drive throughs and food related property is going strong.
9 months ago developers would get 10 separate term sheets from lenders, today they’re getting 3 and the terms are much different.
With rougher debt terms, debt is becoming tougher to justify without cap rates moving much.
I get at least one call per month asking for any distressed asset opportunities. They don’t exist right now.
One global economic factor that gets little attention, should be getting 100x as much attention. The energy crisis in Europe. With Nordstream flows shut, Europe is having to import natural gas via ports from the US and the Middle East, instead of pipelines, which is incredibly costly. Inflation is significantly higher in Europe and isn’t showing signs of slowing. If the US has to import more and more gas and oil to Europe, this will affect US energy costs. Most people don’t know that TEP is mostly run on natural gas, along with many other utility providers. US Natural Gas prices are up 280% since August 2019.
Could the global energy markets be dependent on a cold or warm European winter? How will the energy markets affect inflation? How will inflation affect the Fed?
Do you know what the next year holds? Who the hell knows.
I wish you all, happy holidays and a prosperous Q4 and 2023 : )
-Max Fisher, BRD Realty
*In the former article, Dr Horton was mentioned. That was a mistake, Pulte's earnings call referenced the $800,000,000 in cancelled land acquisitions.*
• Neighboring companies: Raytheon, Target.com, Amazon, Hudbay, University of Arizona Tech Parks, TuSimple, IBM, La Costena Manufacturing, Port of Tucson, AirLiquide, and United Healthcare
• Preliminary site plans and renderings in hand
• Less than .5 mile from I-10
• Survey and Phase One Environmental in hand
• City of Tucson Industrial zoning
• Zoned for cannabis cultivation
• Flat terrain
• Electric, gas, water, and sewer at the lot line
• Frontage on Old Vail Road
Vail is a quickly growing industrial and tech market with quick access to I-10, I-19 and the new announcement of the Sonoran Corridor which connects I-19 to Rita Road at I-10, the same exit for Sunbelt Industrial. TuSimple recently built proving grounds and an engineering campus less than a half mile from Sunbelt Industrial and the Target.com Distribution Center is less than a half mile as well. Sunbelt Industrial is surrounded by UA Tech Parks, IBM, Raytheon, Target Distribution, TuSimple, Amazon, the Port of Tucson, Becton Dickson, Hudbay, Tetakwai, and two new cannabis cultivators.
Electric, water, sewer, gas and telecommunications are at the lot line, a survey and phase 1 are in hand, and the parcel is already zoned I-1 and I-2 which makes this parcel shovel ready for distributors, manufacturers and cannabis cultivators. This is a prime shovel ready site for mid-large scale industrial users in the Southwest region.
Contact Max Fisher for more information.
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2102 N Forbes, a three tenant, flex-industrial business park sold for $1,000,000. Tenants include StageTucson, Meter-Toledo, and Everest Infrared. The property consists of 11,900 SF, 3 phase power, 4 grade level roll up doors, concrete-tilt construction, and 14 foot ceilings.
The Grant and I-10 sub-market is the strongest industrial sub-market in Tucson and torch expects this property to maintain a consistent level of low vacancy.
Despite interest rate hikes, two quarters of negative GDP and a cooling housing market, the industrial market remains strong. We can attribute the strength of the industrial market to the growing retail-e-commerce market, new construction market, overseas supply chain relocation and a lack of inventory.
With a handful of 40+ acre industrial parcels recently sold or in escrow, we can expect new to Tucson developers to start breaking ground in the second half of 2022. The vast majority of this new speculative construction will be catered to distributors and manufacturers occupying 20,000 SF + bays. There has been some talk of interest rates affecting new developments and banks starting to underwrite these developments more conservatively. Recently, we have seen an increase in seller carry back financing and expect to see this trend grow.
User demand for large industrial parcels of land continues as China faces more shutdowns which is driving companies to relocate their manufacturing to the US and Mexico. We don’t expect this trend to slow down any time soon as supply chain challenges look more long term than short term.
So far, there has been no new construction of bays less than 5,000 SF which is putting pressure on small bay industrial business parks. In addition, upcoming redevelopment projects of industrial property are also a key factor in the limited existing supply. Currently, the vacancy rate is below 5% as out of state investors are purchasing property at record low cap rates. To justify the low returns, out of state investors are raising lease rates at least 20%. There have even been reports of 80% increases from out of state investors in lease rates for incubator industrial buildings.
Building materials seem to be flattening while commodities such as steel, copper and lumber start to drop in price. Inflationary pressures continue to affect small and large businesses, especially in the transportation sector as fuel and energy remains high. The two largest problems that businesses are facing today is a lack of labor and inflationary pressures.
Arizona is one of the best positioned states right now as migration continues, supply chain is moving from overseas to Arizona after covid shutdowns disrupted the supply chain, and copper demand continues to increase as the EV, electronics and solar market grows rapidly.
Here are a few of our recent deals highlighted:
Eileen Lewis was interviewed in regards to the current state of the industrial market in Tucson Arizona. James Breeze, senior director and global head of Industrial and Logistics Research at CBRE; Eileen Lewis, director of Property Management at Torch Properties; and Samantha Turner, senior real estate manager at Weyerhaeuser Company were also on the panel.
Some of the key takeaways include:
-There is no doubt that Covid has propelled the industrial market.
-Despite increased construction, vacancy remains low.
-Materials and labor remain high.
-The Amazon effect is spurring other retailers to lease distribution space.
-Tucson is seeing small-medium bay tenants move to Tucson because they can't find space in Phoenix and Tucson still more affordable that Phoenix.
-Vacancy remains very low in the Tucson market.
Below is the link to the BOMA panel interview
A Deeper Dive with BOMA: Taking Stock of Market Vitality in the Industrial Sector (June 2022) - BOMA TV
37,528sf, $1,800,000 Multi-tenant industrial building located in the Eastside Research Loop industrial park. Purchase price $1,800,000. Torch Properties, LLC, through an affiliate entity, purchased 8075-8101 E Research Court from Con-Cor International. The sale closed on 5/4/2022.
Contact Max Fisher, BRD Realty for leasing opportunities 520-465-9989
Max Fisher, Industrial Properties Broker