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As we enter 2025, the Tucson industrial real estate market is showing mixed signals. Could vacancy hit 10% in 2026? 10% vacancy is a very real possibility. Today, Tucson’s industrial vacancy can be described as balanced overall, with rates hovering around 6–7%—a recent uptick. However, most of this vacancy is concentrated in larger spaces over 30,000 square feet, though small to mid-size bays are also seeing a rise in availability. That said, the citywide vacancy rate only tells part of the story. In some areas—particularly north of Grant Road and I-10—vacancy remains extremely tight, below 2%. In contrast, vacancy has increased around Grant and I-10 and within the Downtown submarket, where leasing activity has slowed. Rising crime is becoming an increasingly significant factor affecting vacancy, lease rates, and overall property values in these areas. Lease rates in the Contractor’s Way market are on the rise, driven by strong demand for warehouses with fenced yards that offer secure outdoor storage for materials, heavy equipment, and fleet vehicles. Industrial real estate in the Vail and Marana have become highly desirable. What ties these trends together is a common motivation: businesses are seeking to relocate to areas with lower crime. In addition, rising incidents of air conditioning and copper theft are pushing up insurance premiums and CAM (Common Area Maintenance) charges for both property owners and tenants. Another key factor impacting vacancy is the rise in sublease activity. As more tenants put space on the sublease market, we can expect vacancy rates to increase once those lease terms expire. Subleasing is also a leading indicator of future vacancies, even though most market data doesn’t capture it—since the original tenant is still under lease. 
In 2024 we had more industrial square footage demolished and redeveloped than built and now, around 1,000,000 SF of spec industrial is slated to be completed in 2025. These projects are mostly focused on the larger bay sizes. Small bay construction costs remain high, and lease rates will have to double to justify new construction. While materials costs have dropped, labor costs continue to climb. Overall, construction costs seem to have plateaued. Now with tariff uncertainty we could see another increase in materials costs. We have already seen air conditioning units and parts increase in price and quickly become more difficult to find. The Tucson Airport market is seeing significant growth in its industrial footprint, with expansions and new construction planned to accommodate air freight, e-commerce, and global supply chain operations. The airport’s proximity to the border also makes it a valuable asset for cross-border trade, and the airport's industrial infrastructure is poised for long-term growth. With the airport area demand high, land is now scarce. This lack of vacant land in the airport market will push demand outward into areas like Vail. There are also a few vacant parcels that have already been purchased in the Ajo/Palo Verde market that will soon be developed but large parcels of vacant industrial land are now scarce. The Northwest/Marana market has the highest demand from small-mid bay tenants and buyers. As lots of growth in retail/residential pushes into Marana, the most sought after area in the Southern Arizona region from retailers, consumers and industrial businesses. Lease rates in the Northwest now push North of $1.20 NNN. The Palo Verde market has seen a quick increase in vacancies. The Palo Verde market is the largest and most dense industrial market. With some owners raising rates 20-30% within the past six months, vacancy has followed suit. We can expect lease rates to compress in the Palo Verde market now that a tenant can tour 10 buildings when just a year or two ago they may have had two options to tour. From a demand perspective, we expect new demand in the market to mostly stem from the mining industry and housing industry. The industrial golden child, E-commerce, seems to have slowed. Meanwhile, Sundt’s mining division just purchased the former TuSimple campus in Vail for $22,000,000. With copper prices hitting an all-time high just a month ago and battery minerals in high demand, we can expect the mining industry to continue to grow. Add on tariff policy and critical battery and green energy mineral trade wars with China and domestic minerals become more important than ever. One unexpected demand driver is re-development. While industrial is highly sought after, retail, entertainment and multifamily values are significantly higher. We will see further re-development demand along with eminent domain demand in the southern market as the state starts to expand I-10 between Alvernon and Kino. Eminent domain of existing industrial buildings is already in process along the I-10 corridor as a new interchange will be built at Country Club and I-10. The user market remains strong while the investor market trudges along with very low transaction volumes. We expect the user market to remain strong through 2025 as most of these buildings are less than 50,000 SF as this is the size range where vacancy is the lowest and we have yet to see user demand fall. User values are now even pushing $200 per square foot with the highest values in the less than 10,000 SF market and the warehouse with fenced yard market. Despite fed rate cuts, the ten year remains around 4.3% which means interest rates remain higher. Despite the cost of debt remaining high, there is plenty of demand and dry powder but the gap between buyer and seller expectations has remained too far apart for the past 2.5 years. In addition, the formerly robust 1031 exchange market has almost dried up. When bonds and money markets are yielding 4-5%, it’s tough to justify the management of real estate for a 6% return. In addition to the cost of debt, banks are underwriting in a much more conservative manner. However, higher for longer may result in increased transaction volume in 2025-2026 as 5-year loans mature and owners will have to decide between selling or refinancing. We are already seeing the beginning signs of distress and sales from maturing debts combined with increased cost in real estate taxes, insurance and CAMs. Click below to download the Trend Report PDF 
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AuthorMax Fisher, Industrial Properties Broker Archives
April 2025
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