TUCSON, AZ (May 3, 2024) -- CBRE TUCSON INDUSTRIAL MARKET Q1 2024 - KEY TAKEAWAYS:
- Vacancies decreased 50 basis points (bps) quarter-over-quarter to 5.3% in Q1 2024.
- Net absorption, a key indicator of market stability, continued its positive trend for the third consecutive quarter, surpassing the trailing 3-year quarterly average of 144,250 SF. This trend is a testament to the robustness of the Tucson industrial real estate market.
- Following the completion of 1.8 million sq. ft. of industrial space over the last two quarters, deliveries in Tucson slowed in Q1 2024
- Development activity, or the lack thereof, played a significant role in the Tucson industrial market in Q1 2024. No new industrial properties broke ground or were delivered, contributing to the market's stability.
Tucson continued to see a rise in gross leasing activity, with tenants committing to over 1.1 million sq. ft. of industrial space during Q1 2024. This marks a 127% increase in activity compared to the prior quarter, highlighting the strong tenant demand in the Tucson industrial sector. Net absorption rose to the highest quarterly level since Q4 2022, allowing a sizable vacancy drop during the first quarter. At 5.3%, vacancies are roughly 130 bps lower than the rate recorded at the end of 2019. The combination of strong tenant demand and minimal competition from new speculative supply has fostered robust rent growth, as the average asking rent increased 7% quarter-over-quarter to $0.92 per sq. ft.
Availability and Vacancy
Industrial space availability in Tucson decreased to 6.1%, equivalent to nearly 2.6 million sq. ft. of available space at the end of Q1 2024. Local availability fell the most in the Airport submarket, which recorded a decline of 540 bps quarter-over-quarter to 5%. Overall, five of the metro’s eight submarkets saw vacancy descend quarter-over-quarter. Closing Q1 2024, availability was tightest in the North Central submarket, as the area boasted a rate of 1.1%. Meanwhile, the Northwest submarket maintained Tucson’s highest availability rate at 13.5%.
Market-wide vacancy dropped 50 bps to 5.3% in Q1 2024, a rate that is just 10 bps above the metro’s trailing 3-year average. This marks the largest quarterly vacancy decline recorded in Tucson since Q1 2023. Much of this decrease can be attributed to a lack of speculative supply in the development pipeline and increased leasing activity. Strong tenant demand in the Airport submarket helped lower the local vacancy rate by 540 bps to 4.8%. In contrast, the Southeast submarket posted the highest vacancy increase, as the local rate jumped 170 bps during the quarter to 2.7%. The vacancy was the tightest in the West Central, North Central, and Southwest submarkets, with each area recording a local vacancy rate below 2%.
Lease Rates
Although rent growth has slowed in recent quarters, the pace of gains has accelerated in the Tucson industrial sector. The direct average asking NNN lease rate increased by 7% quarter-over-quarter to $0.92 per sq. ft. in Q1 2024 and is up 5.5% compared to one year prior. North Central Tucson, the submarket with the lowest vacancy, recorded double-digit rent growth quarter-over-quarter to $1.25 per sq. ft. Overall, six of the metro’s eight submarkets posted rent growth during Q1 2024. The average asking rent remained the highest in Northeast Tucson at $1.46 per sq. ft.
Net Absorption and Leasing Activity
The industrial market captured over 1.1 million sq. ft. of gross leasing activity and 214,230 sq. ft. of positive net absorption in Q1 2024. Tenant demand was strongest in the Airport submarket, which posted 454,538 sq. ft. of positive net absorption.
The 3 largest leases signed in Q1 2024 all occurred in this submarket, as The ILS Company, Microstar Logistics, and a Tesla vendor each committed to spaces over 110,000 sq. ft.
Of particular note is the success of Flint Development's entry into Arizona, the 806,606 SF Tucson Commerce Center. It has been particularly active since being completed last year at 3610 & 3780 E Valencia and 6690 S Alvernon Way. The project is now 92% occupied, with 72,000 sq. ft. remaining, and leasing beiong handled by Tim Healy at CBRE.
Development Activity
Following the completion of 1.8 million sq. ft. of industrial space over the last two quarters, deliveries in Tucson slowed in Q1 2024. No new product came online or broke ground during the quarter, keeping the construction pipeline steady at 120,000 sq. ft. The only project under construction as of Q1 2024 is Becton Dickinson’s build-to-suit property in the Southeast submarket on the Northeast corner of Kolb and Valencia. Higher construction costs, tighter lending standards, and economic uncertainty present barriers to development and will likely limit the number of new speculative starts in the short run.
Outlook
Although robust supply additions lifted metro vacancy by nearly 6 percent last year, local market fundamentals have shown signs of tightening. The vacancy rate fell 50 bps quarter-over-quarter to 5.3%, well below levels observed before the pandemic. The market has also demonstrated remarkable stability, posting more than 175,000 sq. ft. of positive net absorption in the past three quarters. This tenant demand has translated into strong rent growth. The average asking rent rose to $0.92 per sq. ft. in Q1 2024, representing over 21% growth over the past 3 years. The market is well-positioned to continue growing over the long term. The diversity of tenants is increasing as the metro continues to attract firms in advanced manufacturing, logistics, e-commerce, and warehousing. Supply pressure also remains minimal, as all 120,000 sq. ft. of space under construction has already been accounted for. Healthy tenant demand and low competition from new supply should drive additional rent growth and help limit upward pressure on vacancy in the coming quarters.
The full CBRE Tucson Industrial Market Report Q1 2024 can be found here.