By: Max Fisher, Industrial Properties Broker, BRD Realty

TUCSON, AZ (March 31, 2025) — The Tucson industrial real estate market shows signs of continued resilience amid broader national trends. Let’s take a closer look at the current state of Tucson’s industrial sector, focusing on vacancy rates, user and investor property values, increased sub-leasing, construction activity, major projects, and national industrial real estate trends that may influence the market.

Vacancy Rates: A Tight Market

Tucson’s industrial real estate market remains relatively tight, with vacancy rates hovering at historically low levels but higher than 2021-2023 levels. As of late 2024, vacancy for industrial properties in Tucson is around 5-6%, which has stayed relatively consistent over the past year. Most of this vacancy lies within the 100,000 SF + bay market. This reflects a broader trend seen in the Southwestern U.S, where demand for industrial space outpaces supply but demand for big bay has slowed.

Construction Activity: 1,000,000 SF +-

In 2024, more industrial square footage was demolished and redeveloped than built. Despite low vacancy rates, construction in the Tucson industrial real estate market has been increasing to meet demand. Developers have responded to the growing need for space by initiating several major projects, breaking ground in November 2024 and set to be completed in the second half of 2025. Around 1,000,000 SF of spec industrial is slated to be completed in 2025.

These projects are focused on the mid to larger bay size range. 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 have seemed to plateau.

Demand Drivers

We expect demand to remain similar to 2024 trends, focusing on e-commerce, mining, defense, aerospace, and the ancillary businesses that support the multifamily and SFR new construction market.
One unexpected demand driver is redevelopment. While industrial space is highly sought after, retail and multifamily values are significantly higher. We will see further redevelopment demand, along with eminent domain demand, in the southern market as the state starts to expand I-10 near Country Club and add a new on/off ramp.

Sub-Leasing Increases

While vacancy remains low, we have seen distress from tenants over the past 18 months. This distress comes in the form of bankruptcies, defaults, and increased subleasing. Most of the distress stems from increases in materials and labor costs. Consumer demand remains mostly steady while dipping in some aspects of the economy. Think big-ticket items like furniture and outdoor improvements, for example.

User and Investor Pricing

The user market remains the strongest 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 and this is the size range where vacancy is the lowest. 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 treasury remains above 4.5% 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 to the cost of debt, banks are underwriting in a much more conservative manner.

However, higher for longer may result in more transactions in 2025-2026 as 5 year loans mature and owners have to decide between selling or refinancing.

Max Fisher’s significant Q4 2024 transactions;