Tucson Realty & Trust Forecasts Optimism for 2017… even more in 2018

TUCSON, Arizona – Hank Amos, President, Tucson Realty & Trust  and his commercial team held its annual press conference recently to discuss the health of the commercial real estate market in Tucson and share optimism on the “Trump Effect”.  One of the longest operating commercial real estate firms in Arizona, Tucson Realty & Trust Co. was founded in 1911, under the laws of the then Territory of Arizona.

Not a political statement, but an economic fact: the last eight years of the Obama Administration did not bode well for the nation or Tucson’s economy. The GDP never reached 3 percent during that time, Amos indicated as a major problem. There may be many reasons for this, but today there is a renewed confidence surrounding America’s future as it pertains to business and the economy, all but attributed to the election of Donald Trump, termed the “Trump Effect” by Amos, as witnessed in the sharp rise of the stock market since the election, and consumer confidence rising to an all-time high since 2001… 16 years ago, These positive signs are attributed to Trump’s promises to dismiss thousands of regulations drowning the economy, including the Affordable Care Act.

“Businesses and individuals feel that the economy is about to take off. Interest rates are expected to stay low with only two rate hikes forecasted for the year,” Amos explained.

Coupled with Tucson’s much-improved job market, the governor’s commitment to our community and the renewed understanding by our local elected officials about just how important growth and jobs are to the vitality of Tucson’s economic fortunes, poses an outlook of positive confidence not seen since the mid 1980’s.

The University of Arizona predicts Tucson economy is expected to grow one percent in 2017 and 1.2 percent in 2018.  In addition to the 5,300 jobs added to our economy last year, an estimated 7,100 jobs in 2017 (two percent growth) and 7,600 jobs in 2018 per George Hammond of the University of Arizona, has a direct and positive effect on personal incomes, retail sales, housing permits and the sale of land.

RESIDENTIAL HOME SALES – BUILDERS FEEL THE OPTIMISM
In regards to residential homebuilders, Amos forecasts much improvement in land sales; however, dampened somewhat by the lack of inventory of platted, let alone improved, lots.  Builders feel the optimism of Tucson’s future, but will be hamstrung to go full boar and we still have some room to sell existing homes. This inventory competes with the new home builders.  That said, Tucson is about to make a major jump and homebuilders realize they should meet this need and replace the number of older functionally obsolete homes that can’t compete with better and newer product.

Builder permits in 2016 ran approximately 24 percent over 2015 – over 2,700 were issued.  One would expect to see 2017 permits to be over 3,000.  New home sales were up about 14.3 percent. The median price for a new home is about $280,614, a 5.1 percent increase over last year. Average price is $324,716, about an 8 percent increase from 2015.

COMMERCIAL LAND MARKET – BACKFILL OPTIMISM
The Tucson Commercial Land Market will also see increased sales and prices rising in most industry segments except Industrial, which still has excessive land inventory.  With the impact of the “Trump Effect” and as Tucson continues to expand its job market, you will begin to see the backfill of Retail, Commercial Businesses (Office) and Industry pick up sites and/or demolishing older buildings for new.  This will be the most activity we will have seen in over a decade. Downtown will go through another transformation as its skyline changes again with over $700 million in development, per Fletcher McCusker, Rio Nuevo Board Chairman.

INVESTMENT – OVERALL OPTIMISM
Michael Gross, Investment Specialist at Tucson Realty & Trust reported nationally, commercial real estate investments in 2016 boded well. All investment markets were very strong and active as investors continued to chase yield throughout the year.  In some cases, driving cap rates to as low as 4 percent in multi-family, the darling of commercial real estate the past few years.  Economic performance in 2017 could benefit from the carryover of last year’s momentum.  This pretty much sums up Tucson’s commercial real estate market as well.

OFFICE MARKET – CONTINUED OPTIMISM
Doug Richardson, Office / Medical Leasing Specialist with Tucson Realty & Trust reported the Office Market was also active as absorption increased, vacancies decreased, and rents remained relatively flat.  Office building sales activity was up compared to 2015 with 16 transactions for buildings over 15,000-square-feet and a total volume of $70,952,990 sold for the year.  Cap rates lowered to 7.98 percent, but for transactions greater than $3,000,000, cap rates dropped during the year to just below 7 percent for the fourth quarter and overall the cap rate averaged 7.7 percent for the year.

“We anticipate many positive and significant developments in the Tucson office market in 2017 and beyond.  Not only have we bounced off the bottom of the Great Recession, but there is a renewed momentum to the market that hasn’t been seen or felt for years. Tucson’s office vacancy decreased to 11.0 percent in the last quarter from 11.4 percent at the end of the third quarter.  It will continue to decrease in 2017.  There was 124,704-square-feet in the last quarter, 410,888 square feet positive absorption for all of 2016, more than the prior two years combined. Class-A projects vacancy is at 10.2 percent; Class-B projects vacancy at 12.6 percent; and Class-C projects vacancy at 6.1 percent.

RETAIL MARKET – REDEVELOPING OPTIMISM
Pat Darcy, Retail Division Head at Tucson Realty & Trust reported retail in terms of vacancy and rental rates remaining relatively flat, although net absorption was positive by 386,786-square-feet.  Sales of retail product was up over 2015, with 16 transactions of properties greater than 15,000 square feet, of which $175,484,670 was sold in 2016.  Cap rates edged up to 6.95 percent.  The largest transaction was the sale of Wilmot Plaza for $47.3 million in September.

In Tucson, urban infill is still where most of the action is. New retail developments are being built where old obsolete retail properties used to be. As you drive in the areas of Tucson where road-widening projects are ongoing, you see this repurposing and/or assembling of older retail properties. Most of these older retail properties that were built in the 1960’s – 1970’s and are economically obsolete in need of replacement. This trend should continue in the central areas of Tucson if there continues to be an overabundance of obsolete properties.

The current retail vacancy rate is approximately 6.4 percent. Quoted retail lease asking rates averaging $15.25 per square foot NNN.

“In my opinion, there is now more optimism within the Tucson Retail Market with new companies entering the Tucson area and existing stores looking to increase their retail presence in Tucson,” Darcy stated. “There is a strong demand for redeveloped retail space in central Tucson.”

A few examples were the Hooters Restaurant recently opening at Circle Plaza, a Larsen Baker development, on a pad site where Play It Again Sports used to be.  A new Bealls Outlet will soon be opening where Sports Authority used to be. Look for some older retail spaces across the street from Longhorn Steakhouse on East Broadway to be assembled, scrapped and replaced by new retail space.  At Craycroft & Broadway the former church east of Hobby Lobby was also scraped and now there are three new restaurants on site with El Pollo Loco, Krispy Kreme now open and Blaze Pizza opening soon. The former 32,000-square-foot Copper Country at the northwest corner of Broadway/Rosemont that was purchased by Larsen Baker will be repurposed.  On Grant Rd., just east of Wilmot Rd., Sauce and Prep & Pastry are now open.

Retail newcomers are starting to add more stores.  Examples include Hobby Lobby (2 stores), Natural Grocers (now with 4 stores open) and Bealls (3 stores). Also, expect continued expansion of Medical Care facilities, dental chains, mattress stores and pawn shops, Darcy predicted.

INDUSTRIAL MARKET – OPTIMISM RESTS WITH MEXICO
Chuck Blacher, Industrial Specialist with Tucson Realty & Trust reporting on the Industrial Market in Tucson saw good gains in vacancy, positive absorption of 1,280,727-square-feet, with no increase in rental rates.  Sales of buildings greater than 15,000-square-feet through year end were up with 22 sales transactions totaling $45,058,306.  Surprisingly, cap rates trended higher for the year at 8.84 percent, up from 8.10 percent.

The Tucson Industrial market ended the fourth quarter 2016 with a vacancy rate of 7.8 percent, down over the previous quarter with net absorption totaling a positive 109,923-square-feet in the fourth quarter. Rental rates ended the fourth quarter at $6.83, a very slight decrease over the previous quarter. There was 159,971-square-feet still under construction at the end of 2016.

“With employment increasing in Tucson from additional jobs at Caterpillar, Comcast, and Raytheon, new home sales should rise, and with it the business of all various building trades and contractors. Contractors take up warehouse space and contractor yards and thus, occupancy should continue to increase notably,” said Blacher. “This looks promising for the Industrial market here in Tucson at least for the first half of 2017. The second half could be in trouble if the new administration fouls things up with our trading partners, notably Mexico.”