For those in Tucson's commercial real estate business, every new year has started with a big new question mark since the COVID-19 pandemic.
In 2021, most corporate employees began working from home, making the question looming: “Is office space dead?” That concern eased in 2022 and 2023 as companies began to persuade employees to participate in the proliferation of hybrid work arrangements, where employees split their time between home and office.
Still, companies have spent much of the last year reevaluating their office space requirements, leading to many “how?” questions. Questions for the commercial real estate industry: How to deal with the potential decline in demand for office real estate. How to offset rising vacancy rates and changes in the way office space is used.
But as 2024 gets into full swing, it appears as if Tucson, at least, will be spared the high vacancy rates that other big cities are facing post-pandemic. The main question now seems to be “why?”
“It was like, 'When is the other shoe going to drop?'” said Barbi Reuter, CEO of Cushman & Wakefield/Picor Commercial Real Estate Services in Tucson. argues that the city's office sector has shown remarkable resilience.
“We saw positive absorption in the office market in 2023,” she said.
“Rents were stable, vacancies were stable, too. So all the indicators are that we're moving away from some of the issues that we're seeing in some of the larger markets where there's a lot of high-rise space. This suggests that they are somewhat spared.”
For the first time, the city can boast that it hasn't built a 20-story office tower downtown since 1986.
The lack of new supply to the market for seven consecutive quarters also contributed. There were no new office buildings under construction at the end of 2023, according to the Tucson office of Dallas-based commercial real estate services and investment firm CBRE Group. Nearly 29,000 square feet of office buildings were under construction due to a slowdown in leasing activity, CBRE reported. While office space returned to the market in the fourth quarter, the lack of new construction mitigated the impact of increased vacancy and actually drove rent growth over the past two quarters.
Changes in consumer behavior, primarily the proliferation of e-commerce and the growing need for local warehouse space, are also benefiting the city.
“Industrial was the strongest performer here due to high demand for logistics and warehouse space,” Reuter said. The biggest player in this game is Kansas City-based commercial real estate developer Flint Development. The company just finished work on the 806,606-square-foot Tucson Commerce Center, a three-building building near the airport, and is currently building another 1.7 million buildings. Tangerine and his square feet of commercial space at the Southern Arizona Distribution Center on I-10.
“2023 was the 'return of the developer,'” Reuter said. “Flint built two important projects. This provided a good indication that there was demand for new construction in the industrial sector, provided the floorboards were the right size and the foundation size was the right size. ”
“Industrial is the strongest market here due to high demand for logistics and warehouse space,” said Barbi Reuter, CEO of Cushman & Wakefield/Picor Commercial Real Estate Services in Tucson. “It was,” he says.
That doesn't mean Tucson's industrial market is booming just yet. The vacancy rate in the industrial sector increased to 6.3% in the fourth quarter of 2023, according to CBRE's Tucson office. The study found that while the Tucson Commerce Center improved vacancy rates in the airport area, the metro area as a whole saw only modest improvements.
Still, Reuter said other developers in the area who have taken a wait-and-see approach to new projects are encouraged by Flint's big splash.
“There are a lot of developers who have plans in place and are finally pulling the trigger and putting shovels in the ground, but with rising construction costs, it’s unclear whether they’ll be able to achieve the rents that will make those projects a reality. , there is some hesitation. So the Flint project is a good test case, and I think these projects demonstrate to other developers that there is a demand for right-sized space.”
Tucson's retail landscape has also changed. Consumer demand and spending rose significantly, driven by retail demand, which Reuters estimates was “well over 6%.” Indeed, Tucson's population has grown to more than 1 million people, making it an attractive location for chain restaurants and retail stores. “Yeah, it's helped everything: restaurants, gyms, entertainment, health care. Pickleball,” Reuter added with a laugh.
Malls also continue to reinvent themselves, moving beyond traditional shopping to offer a combination of retail, entertainment, and dining experiences. “Tucson's shopping mall scene is likely following national trends. That means there is room for some malls with a mix of tenants.”
Her company, which primarily handles space in small malls and neighborhood shopping centers, has been “very consistently performing well,” according to Reuters. Consumers have not lost their desire for products. ”
Medical office space is also expanding, reflecting broader trends in healthcare expansion and innovation. “Medical office space has been, in some ways, the darling of the office market,” Reuter said.
Broader economic factors such as interest rates and construction costs will continue to influence decision-making in this area. But Reuters points to an often overlooked factor in Tucson's resilience as a commercial real estate market: its strategic location as a gateway city in a border state.
“The cost of doing business in Mexico is currently more favorable than in China,” Reuter said. “It also lowers the risk for companies to have their intellectual property compromised or stolen. So we’re seeing this huge nearshoring trend, and Arizona is benefiting from it.” .”
Tucson also benefits from the global transition to clean energy manufacturing. In November, UA Tech won a $35.5 million state grant from the Arizona Department of Commerce to expand its micro/nano manufacturing center. This will also expand workforce training in Arizona's booming semiconductor industry with support from the federal CHIPS and Science Act.
“Arizona is a big beneficiary of the CHIPS Act,” Reuters wrote, pointing to the groundbreaking ceremony last October for the 2 million square foot American Battery factory in Tucson, with an estimated 1,000 jobs and $1.2 billion in capital. The investment is expected to have an economic impact of $3.1 billion, he said. He influenced the state as one of the first lithium iron phosphate battery cell gigafactories in the United States.
“I think we can expect some suppliers to follow suit and hopefully similar industries to bring good wages and healthy jobs to our communities.”
Overall, despite the potential economic uncertainty on the horizon, Reuters feels Tucson's commercial real estate market deserves some optimism.
“One question now is the potential recession and when monetary policy will be eased to the point where interest rates and inflation are more favorable,” he said. “But we still think there's a fair amount of activity going on. The market was generally healthy last quarter. All) vacancies were in the single digits. I'd say we're pretty optimistic.”
