2025 Southern AZ 33rd Annual CCIM Forecast: Insights and Trends Recap

TUCSON, AZ (February 14, 2025) -- As we navigate through 2025, the Tucson commercial real estate market continues to evolve, presenting challenges and opportunities across the various commercial property sectors.  Like the Phoenix Forecast, here are my notes from the 2025 Southern Arizona CCIM Forecast conference, held on February 10, 2025.  This summarizes the various panels and key takeaways provided by Lawrence Yun, head economist for the National Association of Realtors, NAR, based out of Washington, D.C.

Industrial Real Estate

The industrial panel, moderated by Brandon Rodgers, CCIM, highlighted several trends:

• Asking rents are dropping, with rates now at $0.50-$0.65/sf, similar to pre-2020 levels.
• Cap rates have compressed from 7-9% historically to around 6% in recent years.
• Tucson’s market is described as an “awkward teen stage,” with predominantly private capital and limited institutional investment.
• Construction costs remain elevated, though not increasing further.
• Land prices have doubled from $2/SF to $4/SF in recent years.

Multifamily Market

The apartment panel, moderated by Michael Sarabia, revealed:

• Average rental rates are around $1,200/month with an 11% vacancy rate.
• Cap rates are north of 6%
• Lenders are requesting personal guarantees on construction loans.
• Transaction velocity is expected to increase in 2025, with 10-12 transactions predicted for 80+ unit properties (2024 saw only 4 sale transactions – same as 2023)
• Maintenance and repair costs have doubled in the past two years, averaging $1,000/year/unit.
• The senior housing sector is expected to continue performing well.

Office Sector

The office panel, moderated by Mark Irvin, discussed the challenges facing this sector:

• Average lease rates are $24.50/sf full service
• Office properties are taking about a year to sell.
• Cap rates for traditional deals are 9-10%, unless the property is a strong single-tenant net lease property, in which case they would be in the 6-7% range.
• Work-from-home trends continue to impact the sector, with average space occupancy at 25%.
• Conversion of office spaces to other uses, such as apartments or medical facilities, is being considered.
• Tenant improvement costs range from $30/sf for basic upgrades to $90-100/sf for more extensive renovations.

Retail Market

Nancy McClure moderated the retail panel, which highlighted:

• National sale transactions are down 7%, with grocery-anchored centers down 20%.
• Rents are expected to grow 2-3%.  Some high-end spaces now quote up to $50/sf/nnn.
• Cap rates for strip centers are around 7%, while NNN deals still attract investors in the 5-6% range.
• Construction costs for shells have reached $300/sf.
• Car washes have seen significant growth in the market in the past year.

Keynote by Lawrence Yun

Lawrence Yun’s keynote address provided a broader economic outlook:

• The Federal Reserve is expected to cut rates 2-3 times in 2025.
• CPI is at 2.9%, still above the 2% target.
• Transaction volumes in 2023/2024 were below pre-COVID levels.
• Employment conditions remain strong, with a persistent worker shortage.
• The housing market shows signs of recovery, with sales rising at the end of 2024.

Market Outlook

Yun forecasts a generally positive outlook for commercial real estate:

• Lower vacancy rates and improved rents will lead to higher property values.
• Better financing conditions should result in more investment sales.
• Supply varies by sector, with temporary oversupply in multifamily and industrial, permanent oversupply in office, and restrained supply in retail and hotel.

The 2025 Southern AZ CCIM Forecast provided valuable insights into the region’s commercial real estate market. While challenges persist, particularly in the office sector, other areas show promise for growth and recovery. Investors should closely monitor these trends.

For the slide deck, click here:  2025 Forecast

Here were some of the surprising predictions:

1. Office sector challenges: The office market was described as the “whipping boy of properties” with an average occupancy rate of only 25%. This surprisingly low occupancy rate indicates a significant shift in office space utilization.
2. Apartment market oversupply: Lawrence Yun, the keynote speaker, predicted a temporary oversupply in the multifamily sector. This is unexpected, given the general housing shortage in many areas.
3. Industrial market shift: Despite being a strong sector in recent years, the industrial market is also facing a temporary oversupply, according to Yun’s forecast.
4. Retail resilience: Contrary to long-standing concerns about the retail sector, the forecast suggested a restrained supply in retail properties, which could lead to better performance than expected.
5. Interest rate predictions: Yun forecasted 2-3 Federal Reserve rate cuts in 2025, less aggressive than some might have anticipated given recent economic conditions.
6. Worker shortage concerns: Despite high employment levels, there are predictions of continued worker shortages, with potential impacts from immigration policies.
7. Housing market recovery: Yun indicated that low home sales are starting to rise as of the end of 2024, suggesting a potential turnaround in the housing market.

Nick Miner, CCIM, is an ASREB Representative and a Senior Vice President of Orion Investment Real Estate. He is a seasoned commercial real estate professional with over two decades of investment sales experience and a proven success track record. As a Senior Vice President at ORION Investment Real Estate, Nick specializes in helping clients navigate complex commercial real estate transactions and maximize the value of their investment properties. A dedicated educator, Nick has taught commercial real estate classes at Arizona School of Real Estate & Business since 2010, sharing his expertise with other practitioners. His commitment to the industry extends to his active involvement in The CCIM Institute, where he serves on several committees. Nick obtained his BSBA in Accounting and Real Estate & Land Use Economics degrees from the University of Nebraska-Omaha. He earned his CCIM designation in 2003. Nick brings a strong foundation of knowledge and analytical skills to his work. His extensive experience includes over 400 sale and lease transactions valued at more than $500 million, demonstrating his ability to deliver exceptional results for his clients. Nick can be contacted at nick@nickminer.com.