Fewer empty stores, offices in Tucson's improving economy

One of the strongest signs that metro Tucson's economy is improving is the increased number of businesses and tenants filling up its offices, industrial space, stores and apartments.

Occupancy rates for all four major commercial real estate sectors improved in the third quarter and reached their best levels in years, which means more opportunities for jobs and higher wages, according to Cushman & Wakefield PICOR in Tucson.

"When commercial real estate does well, it's because businesses are doing well and people are hiring, and we obviously want and need to see wage growth in our community," said Barbi Reuter, chief operating officer.

"As more employers come here and compete for labor, it will improve wages and job opportunities and it will improve the tax base too," she said.

Reuter can't really pinpoint when things began to improve.

"It feels really good. It has been creeping up for a bit of time. But in monthly meetings, we're afraid to say it. Pinch yourself. It's ok to say it," she said.

The velocity of recent job announcements from Caterpillar, Vector Space Systems, World View and other companies indicates more is to come, she said.

Even consumers are starting to feel the buzz, although more so in Phoenix than Tucson, according to the latest Rocky Mountain Poll by Consumer Behavior Research Center, Inc. of Phoenix.

The Oct. 3-9 survey of 700 statewide residents showed confidence soaring to its highest level since 2007. The level reached 91.7, a 10.5 point increase over the year. (100 is the level of confidence in 1985). It reached its all-time low of 44.2 in January 2009. The survey has a margin of error of plus or minus 3.8 percent.

Consumer confidence in Pima County residents reached 86.5 in October, a healthy jump from 72.3 a year earlier. But that was lower than 98.7 in Maricopa County.

But Pima County residents are less enthusiastic about business conditions than those in Maricopa County. Forty percent of Maricopa residents said conditions are good, while only 24 percent of Pima County residents gave that rating. Fifty percent of Pima residents said business conditions are normal, compared with 45 percent of Maricopa residents. Seventeen percent of residents here rated conditions bad.

Here are highlights of each of the four major commercial real estate sectors, according to Cushman & Wakefield:

Industrial

This sector has seen the most dramatic improvement, with a 8.1 percent vacancy rate that is the lowest in almost eight years. The rate fell from 9.4 percent a year earlier. Homegoods' 858,268-square-foot distribution center really helped, and another 150,000-square-foot building is being built for World View.

Tucson is helped by its proximity to Mexico and by the increasing need for warehouses and distribution centers due to Internet commerce, Reuter said.

Oro Valley and the northwest Tucson area has been especially successful in attracting biotech companies, Reuter said. The region has 9.5 million square feet of industrial space with a vacancy rate of only 4.4 percent.

She said Oro Valley, in particular, has intentionally set out to attract biotech companies to its 535-acre Innovation Park.

Metro Tucson's second-largest industrial area is the 8.85 million square feet in southwest Tucson and around Tucson International Airport. But it has the highest vacancy, at 15 percent.

Office

A lot of surplus space has shaken out, and vacancies for the Tucson office market, which hovered around 12 percent for six solid years finally dipped to 11.5, its lowest point since the end of 2009.

"It's really been the last sector to recover," Reuter said.

In addition to the recession, the office market has been a victim of technology changes. Businesses don't need as much space to store paper documents anymore, and employees get by with smaller spaces.

"There has been a lot of extra space to shake out, and I think that's largely shaken out. Some percentage of the market will remain vacant because it's dysfunctional and obsolete," she said.

Vacancy rates for Tucson region buildings built before 1990 have an average vacancy of 14.89 percent, while those built in the 2010s have a vacancy rate of about 5.8 percent, said Cushman & Wakefield.

The largest concentration, about 4.9 million square feet is in Downtown, where the rate is 6.4 percent. And the second largest cluster, 3.6 million square feet, is in the north Tucson and Oro Valley area, where 10.1 percent is vacant.

Retail

New stores and restaurants and other types of businesses helped give metro Tucson's 51 million square feet of retail space an overall vacancy rate of 6 percent, the best since 2008.

And despite the rise in Internet commerce, malls and other centers are still doing well but they are diversifying. The six major malls in metro Tucson have a vacancy averaging 2.9 percent, better than power centers and other retail spaces.

"Today's customer seems to be more interested in experience rather than things. That seems to be the buzz of millennial shoppers. E-commerce has taken a slice out of the traditional stores. What you are seeing is medical uses, urgent care and clinics," Reuter said. Restaurants continue to be popular too.

TMCOne, for example, opened a medical clinic in a former video store.

Another 356,600 square feet of retail space are being built in the region, particularly on the south, southwest and northwest areas.

Multi-family

What may be good for apartment owners won't be good for tenants. They are likely to see continued rent increases and new owners.

Vacancies in multi-family units fell to six percent in the third quarter, compared with 10 percent in the same period in 2012. As empty units become scarcer, rents rise. Average monthly rents, excluding utilities, have risen from about $630 to $680 over those four years.

Occupancy improved everywhere in metro Tucson except for the southeast, which saw its vacancy climb to 14 percent. The third quarter, of course, always sees more tenants as university and college students return.

But tenants may begin to see their units changing ownership more often as investors become drawn to the stronger rental market.

A Cushman & Wakefield report said Tucson has become a seller's market "as inventory remains very low and demand is extremely high. Many investors express desire to close by year end, over election year uncertainty. We anticipate expansion of investor interest, as Tucson is just beginning to see significant growth."