Economy crimping Tucson's commercial real estate market: Retail vacancies rise, but empty- office rate drops

Jul 17, 2008 (The Arizona Daily Star - McClatchy-Tribune Information Services via COMTEX) -- TCNYF | Quote | Chart | News | PowerRating -- The slowdown in the economy is starting to show a deeper impact on much of the commercial real estate market, according to a market update by Tucson Realty & Trust Co. But the office market is strengthening, the firm reported.

"We've been showing some life come back to our market, at least compared to other markets," Michael Gross, a Tucson Realty & Trust office specialist, said at a midyear update held Wednesday.

Gross said the office-vacancy rate for Tucson is on the way down after rising in recent months. He said he expects it to drop to about 10 percent by the end of this year from 11.5 percent at the beginning of the year.

Currently, it's at about 13 percent, according to Tucson Realty & Trust. But rental concessions -- incentives such as a free month's rent -- in the office market are starting to disappear, Gross said.

That contrasts with the markets for industrial space, retail space, apartment buildings, and commercial and residential land, Tucson Realty and Trust representatives said.

Conditions in those markets may start to improve by the middle of next year, but that depends on whether the housing market -- a major element of the local economy -- picks up in the spring, said George "Hank" Amos III, president and chairman of Tucson Realty & Trust.

"The velocity of how we recover -- I don't know," he said at the Tucson Country Club on Wednesday.

Retail, industrial vacancies

Vacancy rates for retail properties and industrial properties are rising, at least partly as a result of more space being built in both those categories, Tucson Realty & Trust representatives said.

Retailers also are proceeding cautiously with agreements for new locations, said Rita Perez, retail specialist for Tucson Realty & Trust.

"They're going to work with the landlords to see if they can get any breaks," she said.

She said retail vacancy is at about 8.5 percent, with rents "all over the board." About 1.7 million square feet of retail space is slated to be built in Tucson this year, the most in a decade, Perez said. But some of that added space may be delayed because of the economy and tighter standards for borrowing.

Industrial vacancy has jumped to about 12 percent, from about 8 percent earlier this year, Amos said.

The increase has come as more investors have been adding space after vacancy sank to the 6 percent range last year, Amos said. Construction companies, hit hard by the housing slowdown, also have added to the vacancy rate in recent months, he said.

The biotechnological, solar and optical industries are "propping up the industrial market," he said.

Land, apartment markets quiet

Land is a tough sell now, but there are plenty of willing buyers on the sidelines waiting for prices to drop, Tucson Realty & Trust representatives said. Opportunities also are becoming available for investors seeking fire-sale deals, they said.

"A lot of the large land parcels that have not had much activity are going through foreclosures," said Richard Johnson, the brokerage's specialist in ranch and farm properties.

Apartment buildings, once in strong demand, also have shown few sales this year, said George Stamos, Tucson Realty & Trust investment specialist. That has largely been because would-be buyers are offering less than what sellers are willing to accept, he said.

Tenants wanted

Tucson commercial vacancies, according to Tucson Realty & Trust Co.:

8.5%

Current retail vacancy rate

13%

Current office vacancy rate

10%

Year-end forecast vacancy rate for retail and office

12%

Current industrial vacancy rate

--Contact reporter Christie Smythe at 434-4083 or csmythe@azstarbiz.com.

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