Picor: State of the Tucson Office Market

By: Rick Kleiner, MBA, Principal, Cushman & Wakefield | Picor

The Tucson office market had a strong showing to finish 2020, with 162,000-square-feet (sf) of office space coming off the market during the fourth quarter. Quarterly absorption contracted to negative 19,000 sf from the previous quarter’s negative 181,000-square-feet. The vacancy rate improved by twenty basis points to 9.2% from 9.4%, while the overall average rental rate for the metro area dropped to $20.52 per square-foot (psf), from that of $20.91 psf in Q3 2020. The shift is subtle but shows Tucson office landlords are proactively responding to a changing marketplace, enticing tenants with more advantageous deal terms.

The highest demand was found in the downtown submarket with the lowest activity and demand in Tucson’s east office submarket. The residential market continues to be red-hot in the metro area, indicating activity will spill over into the commercial market, though the metrics do not yet demonstrate the connection. Sales activity remains strong, with medical property sales in northwest Tucson leading all areas of the metro area.

ECONOMY

In January 2021, Arizona lead the nation in the rate of new COVID-19 infections. This correlates with many small businesses closing in the fourth quarter and increased unemployment. Unemployment in the State of Arizona and Pima County rose to 7.8% and 7.9% respectively as compared to the U.S. at 6.7%. The highest rate of unemployment is among 16-19 year-olds with 20.1% and 20-24 year-olds with 9.4%. By educational attainment, unemployment is highest among those with a bachelor’s degree or higher.

Year-over-year, Arizona has experienced a 3.3% increase in unemployment from last year and Pima County a 3.7% increase during the same time-period. Job gains by industry were greatest in Trade, Transportation & Utilities which added 6,100 jobs, Leisure & Hospitality which added 3,100 jobs, Financial Activities with 1,700 jobs and Construction with 6,000 jobs. The population in the state grew 1.5% in 2020 and forecasts for continued inmigration are a bright spot.

PRICING

Since the onset of the COVID-19 pandemic, the Tucson office market has seen a reasonably stable average asking lease rate across the market, ending the year at $20.52 psf. The longer it takes to get employees back into the office and the longer it takes for employers to determine what their optimal space size is, the more pressure on landlords to be more aggressive in their pricing and concession offerings. In addition, the increasing availability of sublease space will create additional pressure for more aggressive pricing and concessions by landlords. Sales pricing is primarily being affected by lender pullback and lack of higher quality investor and user properties helping to keep cap rates lower and price per square foot higher.

Read full Office Market Report.