PICOR: Tucson Q3 Office Report

In the third quarter 2021, the Tucson market recorded employment of 384,600 jobs with a positive outlook, up 4.3% over the third quarter 2020. The unemployment rate improved from 7.9% in the third quarter 2020 down to 6.5%. Median household income in Tucson remains steady year-over-year (YOY) at $57,600, in line with national figures. Population grew 0.9% YOY with a positive outlook, more than double the national gain of 0.4%. Due to pandemic-related supply chain issues, housing permits decreased 14.1% YOY in Tucson but remain up 28% year-to-date. Housing demand is stronger in recent years partly due to migration, but supply constraints limit the number of houses sold. Arizona is experiencing a very healthy recovery in retail sales, up 17.4% YOY even while factoring in a dip in July of this year.

SUPPLY AND DEMAND:
Tucson’s office market continues to hold steady, in line with the trend to cautiously return to in-person work. The pandemic has brought an influx of people to Arizona from states like New York, California, and Illinois. However, approximately a third of the workforce remains at-home. Two-year leases are the current norm for non-essential businesses as they navigate strategies with no clear indicators of near-term demand for office space. Essential services such as medicine, insurance and real estate continue to contribute to long-term leases of three years or greater.
Northwest Medical Center continues construction at the Southwest corner of Houghton Road and Old Spanish Trail, on track for completion in early 2022. Downtown, at East Congress and 1 S. Church, office space is being converted to residential. While office space growth was positive, it is not as high-paced as residential and retail. A few other large office properties could be targets for new uses, while some call centers have begun to reduce their current office space throughout the market.

Development land sales in the third quarter 2021 have increased, with areas of growth including south into Sahuarita, Vail, west toward Star Valley and into the Northwest. Residential land development for single family homes and multifamily followed by retail are mainly benefiting from this growth; student housing and office development has slowed due to the pandemic and quarantine. The demand is high, however supply for land is low due to state and national parks land surrounding the core metro area.

PRICING:
A large notable investment sale this quarter was Mister Car Wash® which sold at $8.95 million, $353 per square foot, 6.3% cap rate. The Mister Car Wash® building was constructed in the 1950s and converted into office space shortly before sale. Signed office leases in Tucson for the third quarter 2021 largely remained under 10,000 square foot, showing less growth than other
sectors of the commercial market, but still solid for the office sector.

See full report here.