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Demand for Tucson Office Space – Less, Same or More?

5151 E Broadway Blvd, Tucson, AZ

First published in TrendReport

TUCSON, ARIZONA — Not a day goes by that one of our landlord clients, an appraiser, or lender doesn’t ask us what the Tucson office market will look like once we work our way through the ongoing COVID-19 pandemic. We certainly wish we had a crystal ball that could see through this conundrum; however, it just isn’t that easy. The crystal ball, as clouded as it is, probably would not hold a vision of this pandemic ending tomorrow and all office workers returning back to their offices. The likelihood of this happening approaches zero. But, let’s just say it does end tomorrow, what happens to the office space?

There are good arguments for several scenarios…Tucson office users will need more space to accommodate their returning employees… office users will need the same amount of space… or office users will require less space to accommodate less employees returning to work. One thing is for sure, the office market isn’t going away and will absolutely return to some kind of new normal. Just what that will be is hard to know and likely still several months away.

With so many employees continuing to work from home, employers are unable to determine what their office space needs actually are, and exactly what the new office environment will need to look like. Employers across the spectrum have had very mixed results as to the “actual” productivity of their employees.

Initially everyone felt that working remotely was the way of the future. As more time went by, more employers and employees started rethinking things. Again, the million dollar question is… when will employees return… how many will return… and what environment will be needed to make them feel that they’re in a safe place? So, we offer the following three scenarios for your consideration.

Businesses will need more space.

We all know the feeling these days – “I sure wish that person [talking, sitting, thinking] nearby would just back off.”  As companies resume office activity, many employees are likely coming through the front door carrying this same defensiveness. And for good reason! Social distancing is fully part of today’s business environment. Companies recognize that employee productivity is tied directly with employee wellbeing. Cramped office space may have been accepted pre-COVID without a second thought, but no longer. To accommodate this ‘new normal,’ forward-thinking companies may actually want more office space in Tucson. By providing larger work areas for employees, whether in open work areas or private offices, companies can alleviate employee anxiety and thereby boost overall productivity. Certainly, there are costs involved with this solution, such as increased rent, additional office furniture and related. That said, these increased expenses pale in comparison to the hidden costs of staff turnover and employee friction due to dissatisfaction with their workplace layout. While this scenario won’t play out for every company, it may be the case for more companies than we’d likely expect. And that’s good news for Landlords.

Businesses will need the same amount of space.

When the pandemic is over, users will probably need the same amount of space they are currently leasing. Why? Most companies will probably take a cautious approach pulling employees back into the office with social distancing being the main focus. At first, half to three quarters of a staff could be invited back. Perhaps rotating office workers by week, with distancing for health reasons being a main focus as society in general gets used to the old-normal and settles itself down.

Another option: Employers study their worker’s productivity and those workers who sustain their efforts or produce more from home can stay at home while the rest of the workers return to the office, perhaps on a rotated schedule, as above. The ‘work at home versus at the office’ must be worked through over time; once it is, employers will have a clearer picture of their office needs upon which to act.

Businesses will need less space.

One of the positive results of the pandemic was that companies had to quickly implement processes and systems to allow employees to work from home. Rather than every employee having to work in the office, the pandemic has shown that a radically different office model can be successful. Of course, there have been hiccups along the way. Employees working from home as a permanent solution ultimately will not be the “wave of the future” for many reasons. While the commute is great, for many the isolation and lack of interaction will lead them back to the office. Employees still crave the interaction of their peers and the opportunity to work collaboratively and brainstorm. Others need a work environment outside of their home to focus and be productive.

As we slowly start to climb out of the COVID curve, employers will adapt and recreate the “Creative Office”. A lingering effect from this pandemic will likely see continued social distancing and a reduction of total employees in the office at a single time. A new hybrid with work from home and the office will evolve as the new office model and environment. This re-creation of the office and work environment will lead to a downsizing of office square footage, with only a portion of employees in the workplace at a time. An upside to this downsizing of total square footage is companies upscaling in to higher quality space.

To learn more, the Cushman & Wakefield Office team can be reached at 520.748.7100.

 




Are Voters Feeling the Economy?

OPED by Karen Schutte

If you believe there is a correlation between politics and the economy. The last official snapshot of the economy that came out Friday before Americans vote reminded me of James Carville’s words, “It’s the economy, stupid”.

Hiring is up. Wages are up. The total number of workers and job searchers are up.

But, the question remains: “Are voters feeling it?”

For years, we’ve been told since the Great Recession that the economy was improving ‘we just weren’t feeling it yet.’

On Friday, we heard the Labor Department report, employers added 250,000 jobs in October, extending a record streak of growth to 97 months. Many, including President Trump, have called it “tremendous”.

In Tucson, 9,300 jobs were gained from August 2017 to September 2018, according to the most recent labor report from October 18th.

In fact, total nonfarm employment over the month gain for Tucson was second only to Flagstaff MSA at 3.1%, at 2.4% net job gains.  Higher than Arizona and the Phoenix-Mesa-Scottsdale MSA growth, both at 1.2%.

From September 2017 to September 2018, Arizona’s seasonally adjusted labor force level increased by 54,239 individuals, not an insignificant number.

Friday’s roundup also offered evidence that workers are not only feeling optimistic about job prospects but are actually finding work, which is why the jobless rate was unchanged at 3.7 percent even as employers hired more people. An estimated 711,000 people joined the national labor force last month alone.

As always, the monthly jobs report captures only a particular moment; the underlying trend is what’s important. That caution is particularly pertinent this time.

The back-to-back hurricanes in September and October may have distorted the data in unpredictable ways.  A modest monthly wage gain of 0.2% nonetheless produced a surprisingly big 3.1% jump in annual growth. That was partly because of the unusual drop in pay in October 2017 after hurricanes. Yet even if the year-over-year increase was somewhat inflated, the underlying trends point to a pickup in wage growth.

Some analysts immediately saw warnings of inflation, while others said the pay increase should not bother policymakers at the Federal Reserve. “I don’t think it’s something the Fed should worry about,” Michelle Girard, chief United States economist at NatWest Markets, said. “Productivity growth is picking up, and workers should earn more. It doesn’t mean companies have to pass on higher wage costs to consumers. They can afford to pay them more.”

The Fed, which has increased rates three times this year from historically low levels, is expected to raise them again to 2.5 percent in December as a hedge against inflation.

In a call with reporters, Kevin Hassett, the chairman of the president’s Council of Economic Advisers, cited productivity growth as the explanation for higher wages, and not an overheating economy. He also took the opportunity to say that the president respects the Fed’s independence.

Manufacturing jobs — which have traditionally paid well and have been a focus of President Trump’s policies — increased by a healthy 32,000.

The economy has historically not played an outsize role in midterm elections, and this political season, border control, health care and Brett Kavanaugh’s nomination to the Supreme Court have gobbled up airtime and political ad space. Still, about three-quarters of registered voters say the economy is “very important” in determining their vote, according to polls conducted by the Pew Research Center. Among Republicans, that number is even higher at 85 percent.

We’ll have to wait until Tuesday night to see who is feeling the economy.

To learn more, see ADP Employment October Report.




Tucson Office Market Posts Highest Occupancy in 7 years

tucson-office-vacancy-q3Cushman & Wakefield | Picor reports as a result of steady, organic recovery and job growth, surplus and sublease office space in the Tucson market has largely shaken out. Overall market vacancy hovered around 12.0% for six solid years. At its current 11.5%, Tucson office vacancy is at the lowest point since Q4 2009. The data reveals a strong differential between older and newer buildings, with those built prior to the new millennium sitting at 13.9% vacant, and those built since 2000 enjoying a much healthier 6.0% vacancy. Absorption for the year is on pace to exceed the prior two years, standing at 289,278 square feet (SF) through the end of Q3.

Sales activity in 2016 has not been for the faint of heart. Pricing, cap rates, financing and valuations have varied widely, primarily due to disparate motivations. The distressed seller would accept almost any price, while at the other extreme, some buyers pay a premium for that “right” property or investment.  Prices paid by users varied widely, often for similar properties in the same development. Cap rates ranged from the low 6% to the high 10% range.

Tower cranes are active across the market with office, health-care, and hospitality projects well underway. Specific to office, buildings are under construction for the Girl Scouts on Broadway, at Puente Nuevo on Ft. Lowell and Marana Health Center in Dove Mountain. With a segment of the office stock functionally obsolete, many older properties may be destined for demolition, consistent with the trend toward desirability of newer spaces.

ECONOMY
Greater Tucson was recently named the third fastest-growing metro area over 500,000 population by Bloomberg, with July year-over-year job growth of 4.2% in July, 2016 and total employment of 378,050. The national housing recovery has improved Tucson’s prospects for population growth and is expected to spur construction. Arizona was the only state in the U. S. to experience month-over-month construction job gains in July 2016, and was one of three states to report year-over-year growth. Nationally, September consumer confidence was at the highest level since 2007.

OUTLOOK
Tucson is gaining attention for all the right reasons, on the heels of recognition as a top city for millennials. The food scene has garnered national acclaim after being named the U. S.’s only UNESCO City of Gastronomy. Three Tucson schools were ranked in the top 25 by U.S. News & World Reports. Tucson’s existing businesses, both large and small, have been quietly growing headcounts and have arguably accounted for the Tucson region’s path to vibrancy over 24 months. Recent hiring and growth announcements will add future positive impact. Planned hiring by Caterpillar (600 jobs), Worldview (448), ADP (400), C3 (1,132), Samsung SmartThings (80), and Tucson Medical Center (61) combine for a forecasted economic impact of over $3 billion. And other announcements have occurred, with more expected. The momentum is palpable, and the outlook is extremely positive for Southern Arizona.

To read full report click here.