TUCSON, ARIZONA, July 21, 2023 -- The Tucson office market metrics remained flat midway through the year. Net absorption increased slightly thanks to moderate leasing activity and few move-outs, resulting in a modest vacancy decline. Construction activity remained nonexistent, with no new starts.
KEY TAKEAWAYS
- The direct average asking full-service gross (FSG) lease rate declined further to $22.54 per sq. ft. in Q2 2023.
- The market experienced 55,667 sq. ft. of leasing activity and 18,501 sq. ft. of positive net absorption in Q2 2023.
- Vacancy decreased by 20 basis points (bps) quarter-over-quarter yet remained 360 bps higher than pre-pandemic levels.
Availability and Vacancy
Office space availability in Tucson decreased by 20 bps, dropping to 15.8%. Most submarkets saw a modest quarter-over-quarter decline in availability, while a couple remained unchanged. The Northeast and East Central submarkets clocked availability over 20%, while the small Southwest submarket captured the lowest availability rate at 5.8%.
Vacancy declined in tandem with availability, dropping 20 bps to 14.5% in Q2 2023. All but two submarkets saw slight declines in vacancy. Class A and B products drove vacancy declines, while class C remained unchanged from the previous quarter. The North Central submarket remained one of the most stable and attractive, with 6.6% vacancy.
Lease Rates
The average asking lease rate dropped $0.20 to $22.54 per sq. ft. FSG in the second quarter, while year-over-year growth sat at 1.0%. Class A rates remained essentially unchanged from the prior quarter, while Class B and C products saw declines of $0.31 and $0.05, respectively. The Northwest and West Central submarkets saw slight upticks in lease rates, while the small Southwest submarket saw no change. All other submarkets saw rate declines. The West Central submarket captured the highest average asking rate at $27.09. Rates in the more prominent office submarkets ranged between $21.70 and $23.40 per sq. ft. The Northeast submarket recorded the lowest average asking rate at $18.67 per sq. ft.
Net Absorption and Leasing Activity
The Tucson office market experienced an uptick in net absorption to 18,501 sq. ft. in Q2 2023. Half of the Tucson office submarkets recorded positive net absorption. The East Central submarket accounted for the lion’s share, with 26,637 sq. ft. absorbed. The Northwest submarket accounted for the largest share of negative absorption with 14,697 sq. ft. of newly vacant space.
Overall leasing activity remained stable with 55,667 sq. ft. of gross leasing and few large move-outs. Class B products accounted for most of this activity and more than doubled that of Class A products. Class C products saw no leasing or move-outs. The East Central, North Central, and Northeast submarkets recorded over 10,000 sq. ft. of leasing activity and combined for nearly 50,000 sq. ft. of gross absorption. The East Central submarket alone accounted for 26,637 sq. ft. of leasing activity—almost half of Tucson’s total activity in Q2 2023.
Development Activity
Tucson recorded a fifth consecutive quarter with no construction activity in Q2 2023. High construction costs, rising interest rates, and lingering uncertainty around office demand continued to deter development. These economic trends are expected to continue negatively impacting office development through the latter half of 2023 and possibly into 2024.
It is difficult to predict the future of the office, but there are opportunities for markets like Tucson to capture valuable office users. Tucson remains a headquarter-friendly location due to affordable Class A office space. The market continues to capture value as a rising technology and life science market bolstered by a strong talent pipeline and favorable operating costs.
Recent trends indicate that Class A development in desirable suburban submarkets can yield substantial ROI. As commercial real estate markets adjust to a higher interest rate environment, office demand and growth will reach a new post-pandemic equilibrium. Investors who prepare for this eventuality will be the best positioned to capture ROI in the coming years.
Click here for the full CBRE Office Report Q2 2023.