Arizona’s economy closely follows the national trend, calling for continued growth through 2017. Arizona expects continued gains in jobs, residents, and income at a rate exceeding the national average. Recent announcements by Caterpillar, Vector Industries, Raytheon, Comcast and Ascensus are strong indicators of this trend. Tucson is expected to add over 10,000 jobs in the period from Q2 2016 through Q2 2017. While focusing on past and current performance, businesses in the region will maintain a watchful eye toward broader factors such as regulatory policy, immigration, trade, value of the dollar, and potential federal tax reform. As a border state, positive trade relations with Mexico remain crucial to our economy. Finally, the impact of the new minimum wage ordinances recently passed in Arizona, among other states, will reveal a clearer picture of what to expect in the coming months.
Year over year improvement in office market metrics continues, with a second consecutive quarter of overall market vacancy hovering at a seven-year low. Positive absorption of 31,000 square feet (SF) contributed to a 10.6% vacancy. Increased hiring by employers in engineering and financial services is expected to bring meaningful positive momentum for professional office absorption and eventual upward pressure on lease rates.
As predicted, Tucson’s retail market saw a significant increase of 235,808 square feet (SF) positive net absorption. This improvement is almost six times more than the 40,993 SF absorbed in Q4 2016 and accompanied delivery of nine new buildings totaling 235,958 SF. In the past four quarters, a total of 621,286 SF of new retail space has been delivered, consistent with the observed increase in retail space demand and activity predicted in our most recent quarterly report.
In Tucson's apartment market, the vacancy rate for conventionally-operated, stabilized units decreased by 0.35% from the previous quarter, while improving 0.28% from one year ago to 6.52%. Eight of Tucson’s 15 submarkets experienced occupancy gains, with the greatest improvements occurring in Tucson Mountain Foothills (-2.12%) and South Tucson/Airport (-2.09%).
The Northwest Tucson submarket posted the lowest fourth quarter vacancy of 5.24%. The submarket with the second lowest vacancy was the Catalina Foothills at 5.45%, followed by East Tucson at 5.50%. The highest vacancy rate of 17.56% occurred in the Southeast Tucson submarket.
Tucson’s industrial market continued forward progress in the first quarter of 2017. Net positive absorption of about 50,000 square feet (SF) improved the overall vacancy rate to 7.4%, Tucson’s lowest mark since Q3 2008. The submarket with both the lowest vacancy and the largest inventory at nearly 10 million SF, was Northwest Tucson, with a vacancy rate of 4.3%.
With occupancy above 92.5% and no speculative space under construction, competitive pressure will result in upward movement in rents. A 25% increase in rents must occur for new construction to be financially viable. This is clearly the next step in Tucson’s industrial recovery. While no leases were completed in the largest vacancies during the quarter (those over 100,000 SF), activity in larger spaces was at its highest level in recent history.
Max Fisher, Industrial Properties Broker