TUCSON, AZ (Aug. 1, 2024) - Tenant demand accelerated during the second quarter of 2024. Net absorption returned to positive territory during this span for the first time since Q3 2023. This activity helped lower vacancy by 10 basis points (bps) quarter-over-quarter to 6.6%. Market fundamentals remain tight by historical standards, as the rate is down 60 basis points (bps) from the trailing 3-year average and asking rents continued an upward trajectory for the seventh consecutive quarter, reaching $17.02 per sq. ft. Construction activity stayed relatively stable with no new groundbreakings or completions occurring during Q2 2024.
KEY TAKEAWAYS
- Net absorption returned to positive territory in Q2 2024, amounting to 32,995 ft. The market posted 159,115 sq. ft. of gross absorption during the quarter, which does not account for tenant move-outs.
- Construction activity remained stable, with 391,300 ft. underway in Q2 2024, all user-driven. No new projects broke ground or were delivered during the quarter.
- Tucson's average asking lease rates increased $0.03 NNN per ft. from the prior quarter to $17.02 NNN per sq. ft.
Availability and Vacancy
Vacancy fell by 10 bps quarter-over-quarter to 6.6%. This rate was down 40 bps from 1 year prior and was 180 bps below the rate 3 years ago. Central Tucson recorded a 20 bps quarter-over-quarter decrease to 9.4% the highest rate among local submarkets. South Tucson also recorded a 20 bps vacancy decline during the second quarter to 4.4%, which is the lowest rate among all submarkets. North Tucson’s vacancy rate remained the same quarter-over-quarter at 4.9%.
The market-wide availability rate remained relatively steady at 7.6% in Q2 2024. South Tucson maintained the tightest availability among local submarkets, boasting a rate of 5.1%. Meanwhile, central Tucson recorded the highest rate among all submarkets, with local availability registering at 10.2% at the end of the second quarter. Availability in north Tucson rose by 20 bps during Q2 2024 to 5.9%.
Lease Rates
The average asking direct NNN lease rate was $17.02 per sq. ft. in Q2 2024—a 0.2% increase from Q1 2024. This amounts to an 8.6% gain over the past year. North Tucson registered outsized growth relative to the other submarkets during Q2 2024, with the average local asking rent elevating by nearly 3% quarter-over-quarter to $20.66 per sq. ft. Asking rent in south Tucson decreased by 2.9% for the quarter to $18.02 per sq. ft., while average lease rates in central Tucson rose 0.6% to $16.01 per sq. ft.
Net Absorption and Leasing Activity
The Tucson retail market recorded 32,995 sq. ft. of positive net absorption, during Q2 2024. Tenant demand was strongest in central Tucson, as the submarket recorded 20,355 sq. ft. of positive net absorption during the second quarter. The south Tucson submarket also recorded positive tenant demand, as roughly 14,304 sq. ft. was taken off the market in Q2 2024.
Conversely, north Tucson registered 1,664 sq. ft. of negative net absorption during the quarter.
The Tucson market experienced 159,115 sq. ft. of gross absorption in Q2 2024, which marks a slight decline relative to last quarter. Some of the notable new leases signed during the quarter include Dollar Tree for 26,593 sq. ft. at Desert Square Shopping Center, Spirit Halloween for 23,964 sq. ft. at 5555 E Broadway Blvd, Midtown Mercantile for 13,548 sq. ft. at Rancho Center and ArchWell Health for 10,780 sq. ft. at Rincon Plaza.
Development Activity
Deliveries and construction starts for shopping centers were non-existent during Q2 2024, with the pipeline remaining 391,000 sq. ft, comprising 3 large retailers. This low level of development has aided Tucson in avoiding supply and demand imbalances which helped keep market fundamentals historically tight. Current projects include Gladden Farms, a 155,000 sq. ft. shopping center anchored by Fry’s Marketplace in Marana, a 136,000 sq. ft. Home Depot in Houghton Town Center, and a 100,000 sq. ft. Bass Pro Shops in the Marketplace at the Bridges. All 3 of these retailers are expected to open their doors in 2024. With the bulk of under-construction products already preleased, supply-side pressure should remain minimal over the near term in Tucson.
Roughly 684,000 sq. ft. of retail is proposed throughout the metro. The bulk of these projects are planned in higher residential growth areas such as north Tucson. However, many of these plans are unlikely to break ground in the near term, as current interest rates and construction/labor costs dampen new construction and interior tenant improvements.
Outlook
Tenant demand is steady, and market conditions in Tucson remain tight by historical standards, as the vacancy rate is 70 bps below the metro’s long-term average. However, the closures of some Family Dollar, Big Lot’s, Conn’s Home Plus, and others feeling financial stress from consumer’s pulling back spending could spur a rise in available space. While the potential for an economic downturn this year may present some short-run risks, prospects over the long term remain bright. Tucson boasts healthy demographics, as the market has gained nearly 28,000 new residents since 2019 and is projected to add an additional 33,000 new residents over the next 5 years. Furthermore, Tucson has a relatively stable job market, with local unemployment registering at 3.1% as of May 2024, a rate 90 bps below the national average. Median household incomes have also increased by 14% since 2019 and are projected to rise an additional 19% over the next 5 years. These factors should continue supporting local consumer spending, ultimately benefiting Tucson's retail fundamentals over the long run.
Download the full Q2 2024 Retail Report here.
For more information, Nancy McClure can be reached at 520.323.5117.