We’re pleased to announce the August mid-year issue of Trend report  is out! Trend report,  a sister company to the Real Estate Daily News, is a monthly publication that covers  new developments, transactions, market trends, policy issues, as well as in depth submarket and sector updates contributed by industry leaders. The editor’s comments from the August issue follows:

We’ve cast a wide net for trends in this mid-year issue.

While commercial real estate leaders watch the housing market and overall economy for signs of a recession, the National Association of Realtors chief economist said this week to “look to commercial real estate for clues about the direction of the economy and whether or not we are heading into a recession.”

Our standard way of doing things is being turned upside down, including looking for real estate trends and Tucson just set a record sales price for multifamily on July 5th.

There’s nothing straightforward about the question – “are we heading into a recession?” It’s just more chaos for now, as witnessed during the first half of the year and more of the same expected on the back end of the year. Statistically, there are still two job openings for each unemployed person nationally. So, it’s difficult to see a recession, this year at least.

The ability to adapt and innovate is more important now than ever. Maybe this is the new normal. There are opportunities among the challenges being faced, and some will gain by these opportunities.

Amongst all the chaos, our mid-year issue of Trend report, wanted to highlight some young leadership in our community.

Content contributors such as Zach Yentzer, Executive Director of Tucson Young Professionals with almost 1,000 members; John Winchester, Director of Government & Community Engagement at ASU; Liz Pocock, CEO of Startup Tucson; Dre Thompson,CEO of Tucson Industrial Development Authority; and Rob Elias, President/CEO of Tucson Hispanic Chamber of Commerce, inspire hope and optimism with their work multiplying community leaders.

Members of the Millennial generation (born between 1984–2002), are hungry to change the world. In the next fifteen years, 45 percent of the workforce in the U.S. will be disappearing, mostly Baby Boomers. These vacancies must be filled by young, trained leaders; and to this end, Jim Marian updates us on his work with the MRED program at UA, and Ethan Orr, Director of UA’s Agriculture, Natural Resources, Economic and Community Development Programs, reminds us of the great youth leadership development programs UA offers across the state.

Sam Credio, PE, Director of DTM at the City of Tucson, lays out what to expect from his $280 million for road improvements, calling it a “historic investment in our community.” Prop 411 promised to bring road improvements to every neighborhood street in the City within the next ten years, and we’re confident if anyone can, Sam can.

The mid-year economic outlooks from Ryan Severino, Chief Economist at JLL; Danny Court, Senior Economist at Elliott D Pollack & Company; and George Hammond, Director of the Economic & Business Center of Eller College of Management at UA help explain some of the market conditions to watch.

Housing permits discussed by Jim Daniel of RL Brown remind us that Tucson and the state of Arizona don’t generally follow national trends and fare much better than most other areas, amid the economic and population expansion we are experiencing.

We are delighted to welcome a newcomer to Tucson in this issue. David Krumwiede, Senior Executive Vice President of Lincoln Property Company, which recently closed on 77 acres of land to pave the way for I-10 International, a one million square foot, Class A industrial project, in a Trend report exclusive, explains “Why Tucson?” for this $260-million “creative industrial” vision.

In conclusion, Jessa Turner, Director of Communications, Tech Parks Arizona, walks us through what’s happening at the Tech Park.

Commercial Sales Activity for Pima County shows a 104% increase in sales volume over last month and a 50% increase YOY in volume, with July expected to be much the same according to RED Comps tracking.

Demand for Tucson’s multifamily market continued its stable performance and elevated rent growth in Q2 with healthy sales volume. Many investors are relying on continued rental growth in Tucson, as the value-add market remains strong.

Our next Trend report for September will be on Multifamily, so expect more details then. See PICOR’s Q2 2022 Marketbeat.

Tucson’s industrial market became increasingly active in Q2, with 164,423 SF of positive net absorption, a threefold increase from Q1. See CBRE’s Tucson Industrial Q2 2022.

Tucson retail is recovering, with more fitness gyms, nail salons and restaurants coming to strip centers and is expected to hold up to CBRE’s National Q2 2022 Figures.

Tucson’s office market is another story and saw a downturn in net absorption Q2, reaching the largest net negative absorption as well as highest increase in vacancy for the past four years. Some form of working from home appears to be a permanent feature of our new normal. See CBRE’s Tucson Office Figures Q2 2022.

It’s an eclectic issue, which matches an eclectic first half of the year. Thanks to our Trend report team: Patti van Leer, Michael Rossmann, Melissa Vucijevic, and Jack Paddock for their help.

And thank you to our readers for your continued support. As always, we appreciate your feedback and welcome any comments.

If you don’t subscribe and would like to learn more about Trend report, or receive a complimentary copy of this issue, please email us at TrendReportAZ@outlook.com.

Karen Schutte
Managing Editor

For investors looking for investments $20 million and under, Tucson ranked number 4 on the list of small/middle sized markets. A larger driver of the demand for multifamily in Tucson is the attractive year-over-year (YOY) average rent growth of 9.1%. The shortage of affordable and traditional housing in Tucson also fuels apartment rental demand. With construction costs tripling on certain building materials, housing development has slowed down drastically over the past 12 months. In a market with the typical average residential for sale inventory at about 6,000 listings, fewer than 1,000 homes are for sale. This shortage has led to increased demand for multifamily living, which in turn has driven down Tucson’s vacancy rate.

COVID UPDATE

Since the late December COVID-19 vaccine rollout, more than 61% of eligible Pima County residents have been fully vaccinated. Governor Ducey relaxed mask mandates and lifted restrictions for bars, movie theaters, restaurants, public events, concerts, and clubs. The University of Arizona held an in-person commencement ceremony for spring 2021 graduates. The University is also rolling out their Fall 2021 re-opening plan which includes a full in-person class schedule along with optional virtual learning. The CDC’s federal ban on evictions was set to expire on June 30th, but a recent ban by the Center for Disease Control and Prevention (CDC) has extended the eviction moratorium through July 31st.

TRANSACTION UPDATES

Tucson is primed for a strong second half of the year for sale transactions following a nearly record first half of 2021. Total sales volume totaled approximately $190 million in Q2 2021 (up 102% YOY) and an average price per unit of $108,000 (up 93% YOY). Timelines and transaction terms are drastically swaying sellers’ decision when receiving offers. With financing contingencies a thing of the past, quick due diligence timelines or even immediately non-refundable earnest money are common offering terms in the current market. With investors eager to acquire Tucson properties, we expect similar sales volume and activity in the upcoming quarter.

SUPPLY (INVENTORY) VS. DEMAND (INVESTORS)

Multifamily properties that hit the market are faced with a heady amount of demand from investors eager to break into the red-hot Tucson market. With more and more syndication groups focusing their sights on secondary markets like Tucson, it brings more nationwide money and interest to the market. Tucson’s relatively low cost per unit and favorable cap rates are attractive to investors leaving inflated markets like California, the Pacific Northwest, Denver, Texas, and even Phoenix. With heightened demand, the Tucson multifamily market has not skipped a beat; average time on the market for well-priced properties is under two weeks. It is a great time to be a seller in Tucson as supply of properties available for sale remains low amid soaring demand from investors.

FINANCING

Lending activity and lender appetite for Tucson multifamily continued to increase in 2Q. Both Freddie Mac and Fannie Mae have become more aggressive to win business as they posted lower production numbers than expected in Q1 as they were adjusting to a lower production cap by the regulators. It is expected that they will remain aggressive throughout the year to compete with banks, life insurance companies, and debt funds as each of those lending sources are actively chasing more multifamily opportunities. Rates are stabilized and expected to remain near historic lows throughout the rest of the year. Both Freddie and Fannie have removed most of their requirements for debt-service escrows at closing related to COVID. For stabilized properties, monthly rental collections are extremely important and a property that can demonstrate success throughout the pandemic will be highly attractive to lenders. Stabilized loans are more frequently DSCR constrained due to low cap rates, but 70-75% LTV loans for less than 100 unit properties will witness rates between 3% – 3.5%. Value-add loans in the same range can typically achieve 75% Loan-to-Cost with floating-rate coupons in the 3.5% – 4.5% range. For loans above $10 million, these rates can decrease significantly. Credit: Kevin Prouty –  Mortgage Banker  – Tucson, AZ

OUTLOOK

For the remainder of 2021, the Tucson multifamily market will see strong continued growth. This is due to the market’s relatively low pricing per unit and competitive market cap rates compared to larger markets like Phoenix, AZ. The shortage of supply is causing competitive marketing processes and groups assuming more risk in their offers to secure a deal. With a drastic need for Tucson housing supply, that won’t easily be fixed unless construction costs lower, the Tucson multifamily market will likely see continued rental increases while vacancy remains low.

View full report here.

A recent survey of commercial real estate brokers by Arizona State University’s W. P. Carey School of Business shows a slow and steady recovery continuing for at least another six months. Experts say the Phoenix-area commercial real estate market is on solid ground and they feel optimistic about the future, but near-term activity will likely be slow.

The Fall Brokers Forum Report, a forecast of market conditions for October 2016–March 2017, shows that uncertainty remains and appears to be heightened, as evidenced by responses to the question, “In what direction is the metro Phoenix market moving?” For two years, 100 percent of respondents said the market was moving up. The current survey shows only 88 percent believe the market is moving in an upward direction. Couple that with the question, “Where are we in the cycle?” — where only 52 percent of respondents believed the market was in an expansion mode — and it is clear that uncertainty and cautious attitudes remain.

The W. P. Carey School gathered the group in early October to discuss their insights and thoughts about what will happen between October 2016 and March 2017. The event included a survey of 116 commercial real estate agents and brokers active in the multi-family, retail, industrial, land/housing, investment, and office segments of the Phoenix market. Participants came from a variety of sectors, specializations and brokerage houses across the Valley. The event was moderated and co-organized by Pete Bolton, executive vice president and managing director of Newmark Grubb Knight Frank’s Phoenix office.

“It is clear from the results of the survey that Forum members are uncertain about where we are today, but they remain confident the metro area will continue to expand in the long term,” explained Mark Stapp, executive director of the W. P. Carey Master of Real Estate Development program. “Uncertainty about the next six months remains in the back of our Forum member’s minds. We are known for being a ‘boom and bust’ market. I think Phoenix may be ‘growing up,’ and this is a more sustainable pattern seen in more mature commercial markets.”

To view the full report, visit the Center for Real Estate Theory and Practice Web page at https://research.wpcarey.asu.edu/real-estate/commercial-reports .