1

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.

 




Picor Reports a Sizzling Multifamily Market Mid-Year

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.

 




C&W | Picor Report: Wind in the Retail Sails/Sales

kitesurfing
Kitesurfing in Baja

At 2014’s midway point, the Cushman & Wakefield | Picor retail market report for Tucson reports positive performance, with the winds continuing to blow in the direction of retail sails / sales.

In summary, a lower unemployment rate for the Tucson area than at year ago and decreased government spending both impacted Tucson’s retail market momentum and activity. Home prices were flattened in Q2, while the inventory of Tucson residential listings increased.

Retail sales statewide were up 7.6% over the prior May, with strength in durable goods, increasing to 8.0%. In addition to durable consumer goods, building material sales jumped significantly year-over-year, and overall retail sales outpaced employment growth.

Market fundamentals continued to improve as supply tightened. Second quarter positive net absorption of 129,159-square-feet represented the ninth consecutive quarter on a positive trajectory. At 6.5%, vacancy reached its lowest mark since Q4 2008, a predictor of slowing absorption. Continued market firming put upward pressure on asking rents, which increased 2.3% over the previous quarter to $14.52 PSF.

Activity and absorption for the quarter was markedly more distributed and diverse. That being said, of the market’s largest true retail leases, second quarter activity trended toward automotive uses and discount retailers.

Downtown saw a key puzzle piece solidified with its first specialty food market signed: The 5,000-square-foot Johnny Gibson Downtown Market in the heart of the entertainment district; and Mattress Firm’s acquisition of Bedmart will likely result in future store consolidation and availabilities.

The first quarter saw the opening of a 99,594-square-foot Walmart at Houghton Town Center. New construction includes the redevelopment of Broadway and Wilmot by a local developer where demolition has begun for phased rebuilding. A new-to-market Cheddar’s is being built at El Con Mall in midtown and is expected to put pressure on other restaurants in the sit down family category.

El Con Mall sold in the second quarter representing a significant investment transaction for Tucson at $81.7 million. With pent up demand, it is a great time to be a seller. Cap rates and interest rates are low, and appetite is high for retail investment property, both single tenant and multi-tenant. Multiple offers are the norm, and values are increasing. User purchase activity remains relatively quiet.

Downtown Tucson will continue to shine brightly for development and absorption, with the late July opening of the Modern Streetcar and the return of student residents. We expect new construction to increase as Tucson approaches a stabilized vacancy rate; particularly if consumer confidence continues to improve. Look for continued stabilization and gradually increasing rental rates. Supply of investment grade property may remain limited, but demand will be high from investors when sellers are ready to divest or trade.

To read the full Cushman & Wakefield Retail Market Report click here: https://picor.com/wp-content/uploads/2014/08/Tucson_RET_2Q14.pdf