Re-Shpaing Of Tucson's Industrial Market

​The Tucson industrial market is entering a transitional phase—one that feels materially different from the post-pandemic surge yet not a slowdown. Over the past two months, activity on the ground has picked up meaningfully, but the composition of demand has shifted. Instead of large distribution users driving absorption, we are seeing a decisive move toward industrial outdoor storage (IOS) and power-intensive manufacturing users. These shifts are reshaping both leasing dynamics and investor expectations across Southern Arizona.

​At the center of the current market narrative is a tightening supply of functional space—specifically, bays that can support high electrical loads and outdoor storage. Manufacturing activity has accelerated noticeably, driven by smaller to mid-sized operators expanding or relocating operations locally. These users are not looking for generic warehouse product. 

They need infrastructure—particularly three-phase 480-volt power—to operate CNC and EDM machinery. Unlike 2021, where distribution was the demand theme, clear height and loading becomes less relevant as amperage and voltage becomes more relevant. 

This has created what can best be described as a mid-stage supply crunch for high-power industrial bays. While vacancy in the broader market increased substantially over the past year, nearing the 10% mark, that figure masks a growing scarcity of usable inventory for certain tenant profiles. Spaces with sufficient amperage, modern electrical panels, and the ability to accommodate heavy equipment are being absorbed quickly.

At the same time, demand for industrial outdoor storage continues to strengthen—and in many ways, this segment remains the tightest in the entire Tucson industrial ecosystem. Supply is extremely limited, particularly for sites that offer both office/warehouse improvements and yard space. Tenants are increasingly unwilling to compromise by taking pure yard-only sites. Instead, they are prioritizing properties that combine secure outdoor storage with a functional building component for operations, maintenance, or administrative use. Oversized roll up doors, wide turning radiuses, perceived safe areas, total land mass, and access to I-10 are big bonuses and often non-negotiables from IOS tenants.

The most sought-after IOS configurations today are sites with at least one acre of usable yard with buildings located on the edge of the lot. These properties provide the flexibility that contractors, equipment operators, and material suppliers require. The demand is not speculative—it is directly tied to real and expected economic activity, particularly residential development across the region.
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Recent large-scale land acquisitions by homebuilders in areas like Marana and Vail are a key driver behind this trend. Retail then follows the rooftops…..think Tangerine and I-10. Multi-hundred-acre subdivision projects are moving forward, and with them comes a wave of contractor demand. Every subdivision requires a network of subcontractors—grading companies, utility installers, framing crews—each of whom needs space to store equipment, materials, and staging operations. Think pipe, trenching equipment, and heavy machinery. These users are not temporary in nature; they often require multi-year commitments aligned with the development timeline.

​As a result, IOS demand is being pulled forward by development pipelines that are already in motion. And because Tucson has historically had limited zoned and improved IOS supply, the imbalance between supply and demand continues to widen. The optics of outdoor storage also affect municipal stances on IOS. 

While these segments are strengthening, the distribution market tells a different story. Demand for larger bay spaces—generally those exceeding 30,000 square feet—has softened considerably. Much of the tenant pool that required these spaces over the past several years has already been satisfied. The urgency that once drove rapid leasing in this size range has dissipated, and newer demand has yet to fully backfill that gap.

As leases signed at the peak of the market begin to approach expiration—many of them structured as five-year terms—we could see an increase in vacancy within this segment. Tenants may downsize, consolidate, or in some cases exit the market altogether, particularly if their business models have adjusted post-pandemic.

Despite these risks, overall market fundamentals appear to be stabilizing—and potentially improving. The increase in vacancy last year was significant, but it now appears that we are at or near the peak. Leasing velocity has picked up, particularly in the small to mid-bay segments and IOS category. If current activity levels persist, vacancy should begin to trend downward over the coming quarters.

Another variable to watch closely is the capital markets environment. A growing number of industrial properties are approaching loan maturities tied to debt placed approximately five years ago. Those loans were often secured in a dramatically different interest rate environment. As they reset at today’s higher rates, owners may face materially increased debt service obligations.

For properties with stable occupancy and strong tenant profiles, this transition should be manageable. However, assets experiencing vacancy could face pressure. Rising operating expenses combined with higher debt costs may create situations where owners are forced to recapitalize, sell, or otherwise restructure. While this dynamic is worth monitoring, it is unlikely to result in widespread distress across the industrial sector. Tucson’s fundamentals remain relatively sound, particularly in the segments where demand is strongest and the investor landscape is much different locally compared to nationally.

In many ways, the current moment reflects a normalization of the market rather than a downturn. The surge in vacancy last year created the perception of softness, but what we are seeing now is a reallocation of demand.
Industrial outdoor storage and power-intensive manufacturing are not just niche segments—they are emerging as core drivers of Tucson’s industrial economy. As long as residential development pipelines remain active and manufacturing demand continues to expand, these trends should persist.
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The challenge for landlords and developers will be adapting to this new demand profile. That may mean investing in electrical upgrades or reconfiguring sites to accommodate yard space. Those who align their product with where demand is heading—not where it has been—will be best positioned to capitalize