Inside Tucson Business - Commercial Real Estate August 2011

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2 AUGUST 12, 2011 | COMMERCIAL REAL ESTATE INSIDE TUCSON BUSINESS

COMMERCIAL REAL ESTATE

By Roger Yohem

Inside Tucson Business

Halfway through 2011, the commercial real estate sector is still holding its own and marking time, anxiously waiting for a sus-tainable recovery. Th e consensus among industry experts is that the worst economic damage caused by the Great Recession is over.

For the Tucson-area market, steady im-provement is still two or three years away. Th e region’s uncertain economy and high unemployment has produced unstable rents, occupancies, sales prices, and lend-ing conditions.

As this special section was put together, local experts often turned to clichés to de-scribe their feelings about commercial real estate’s performance during the fi rst half of 2011:

• Now is the time to buy.• Now is the time to rent.• Investors are still sitting on the sidelines.• Only jobs can heal the Tucson economy.• To buy time, kick the can down the road.PriceWaterhouseCoopers, a global fi -

nancial services company, projects that $250 billion to $300 billion in commercial real estate loans will mature across the United States every year through 2015. In the Tucson region, $150 million to $200 million annually is realistic.

As this debt matures, some owners will be able to sell or refi nance. Yet only the best properties will get loans. Scores of stressed assets will default due to fi nancially trou-bled owners, bankrupt tenants, or other overwhelming economic conditions.

In the short term, PriceWaterhouseCoo-pers expects commercial foreclosures to

accelerate. At that point, cash-rich in-vestors will leave the sidelines to buy bank-owned prop-erties at discount prices.

Obviously, lend-ers and owners are anxious to move past the economic car-nage to repair their

portfolios. Buyers however, don’t want to move too soon fearing that property values could erode even further.

One factor helping to stabilize the Tuc-son market is its fi xed supply of space. Un-like some other markets, new construction has been nominal in recent years. Th e re-gion is not overbuilt.

Since the Great Recession, many indus-try experts, pundits and investors game-fully forecast when the market bottom and

Halfway through 2011, commercial real estate holds on, waiting for recoveryOVERVIEW

About this sectionStatistics and reports in this special section were provided by CB Richard Ellis, Coldwell Banker Commercial Group, CoStar Group, Grubb & Ellis, Picor Commercial Real Estates and Tucson Realty & Trust. In sectors where data from sources were not an exact match, an average or median number was used that best represented those market conditions.

recovery would, will, has or had arrived. Th at challenge has since lost much of its appeal due to the unknown number of dis-tressed properties in the pipeline.

In Southern Arizona, high unemploy-ment is choking off economic recovery. Only job growth creates demand for commercial space. Once that occurs, rents and occupan-cy rates should improve in all sectors.

ROGER YOHEM

As the commercial real estate sec-tor marks time, the game has shifted. All the players, including brokers, own-ers, investors and local governments, are looking for improvements that are substantive and sustainable.

Contact real estate reporter Roger Yohem at

[email protected] or (520) 295-4254.

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COMMERCIAL REAL ESTATE | AUGUST 12, 2011 3InsideTucsonBusiness.com


By George Amos

Commercial real estate investment in Tucson continues to struggle even as the number of sales transactions increases. As other regions around the country are reporting improving real estate markets, investment in Tucson still faces headwinds.

During the fi rst half of 2011, total dollars invested in Tucson declined 44 percent from the second half of 2010. Yet the number of transactions actually increased 8 percent, a trend that began during the last half of 2009.

So, while the number of sales is increasing, the properties are smaller and the price per foot is declining, result-ing in a lower total dollar volume. Th is makes it diffi cult to tell if the market is gaining momentum.

At the national level, banks are steadily dealing with bad loans. Loan perfor-mance for life insurers exceeded Fitch Ratings’ expectations in terms of losses in 2010, so the debt market is stabilizing. Property demand is improving in terms of vacancy and absorption trends and values in major markets are improving.

Back on the Tucson scene, the apart-ment market is expected to improve as renting remains more attractive than buying a home and there is little new construction in the pipeline. Offi ce ab-sorption is fi rming up, driven by gains in offi ce employment. However in the short

Although sales are up, it’s diffi cult to see momentum

INVESTMENT OVERVIEW

term, further labor market weakness could inhibit recovery in the offi ce segment.

Retail real estate will probably benefi t from more stable consumer spending, but not if gas prices stay high this summer and consumer confi dence erodes further.

Th e industrial segment is bottoming out but demand appears to be picking up as industrial output continues to rise and exports are at all-time highs. Th ese trends indicate that good economic fundamentals are in place for this sector.

More telling is for the fi rst time in a long time, some industry publications are now talking about specifi c asset classes to target for investment rather than focusing only on distressed assets. Investors may be able to take advantage of improving real estate conditions by considering a num-ber of strategies in addition to distressed property such as senior housing, student housing, medical offi ces and self-storage.

It appears the broad market is poised for improvement if broader economic conditions cooperate. However, mar-ket conditions really won’t acceler-ate until the housing sector improves and consumer confi dence picks up.

Th at said, with prices at the bottom, vacancies starting to fi rm up and interest rates close to historic lows (but projected to go up as infl ation kicks in), conditions appear ripe for a notable increase in the purchase or lease of commercial real estate.

George “Hank” Amos III is president and CEO

of Tucson Realty & Trust. Now in its 100th

year, the company was founded one year

before Arizona became a state. Contact Amos

at [email protected] or (520) 577-7000.

GEORGE AMOS

Only job growth will increase demand for commercial space.

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By Gordon Wagner

“A choppy recovery” aptly describes the Tucson commercial real estate market. Conditions are getting better even if we are progressing with fi ts and starts.

As we note activities in the market seg-ments, it’s hard to fi nd anyone who thinks a signifi cant turnaround is likely before 2014, but most agree we are headed in the right direction. Sales and lease activity exists, al-beit not on the level or prices of a healthy market.

In general, it’s a great time to be a ten-ant. Tenants with proven track records can upgrade their location and/or physical plant and likely lower their occupancy cost. Many landlords who initially thought the downturn would have ended by now are still making previously inconceivable con-cessions.

Landlords lower rents to “kick the can down the road” for a couple more years, hoping to augment cash fl ow (or hang onto their properties) until they can fi ll them, raise rents and realize the performance they once had or meet the projections they envi-sioned when they acquired the property.

It’s also a great time to purchase com-mercial real estate, especially if the buyer’s business is a user of the property. Prices are at levels similar to eight to 10 years ago. In-vestments are for the long haul. Buyers will look back on their 2010-2012 purchases as great acquisition decisions at well below re-placement costs.

Financing is diffi cult. Lenders are strict-ly underwriting loans and requiring hefty down payments, usually a 25 percent mini-mum. Buyers with cash can usually lever-age a great price.

Most investors are still on the sidelines, cautiously eyeing the market for their ideal investment.

Th e expected shift is from home owner-ship to renting. We see several apart-ment communities developed to serve a higher income de-

mographic, reportedly such as the old golf range on east Tanque Verde Road.

Th ere is national interest in our older apartment communities that can be ac-quired at bargain prices, mostly below re-placement cost. Th is takes advantage of Tucson having some of the lowest apart-ment rental rates in the West.

Prepared land for subdivisions is be-ing acquired near, or at the cost of, the in-frastructure improvements. With prices

With fi ts and starts, choppy recovery will continue until about 2014MARKET OVERVIEW

A time to buy real estate, despite tough fi nancingIt’s a great time to purchase commercial real estate, especially if the buyer’s business is a user of the property. Prices are at levels similar to eight to 10 years ago. Investments are for the long haul.

roughly equaling the infrastructure cost, the land is eff ectively free. New homes must be cost-competitive with resales.

Th e broad market has started to stabilize. Many landlords have weathered the storm and commercial foreclosures were not as extensive as feared.

Plus, Tucson didn’t overbuild like Las Vegas and Phoenix.

As the national and state economies

GORDON WAGNER

gradually evolve and improve, these points will serve to accelerate Tucson’s commer-cial real estate recovery.

Gordon Wagner is a Commercial Broker with Coldwell Banker with over 30 years experi-ence in all aspects of commercial real estate, management and development. Contact him at [email protected] or (520) 529-7584.

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By Roger YohemInside Tucson Business

Just like consumers who have gotten into the habit of shopping sales for merchandise, merchants have become better at shopping for cut-rate leases from landlords.

Th at’s why at mid-year 2011, retail real estate has scored a mixed performance.

Despite a notable buzz in activity, the market basically moved sideways. Lenders, landlords and tenants made give-and-take moves that, when the dust settled, resulted in a slim drop in the vacancy rate.

Th e moves and counter-moves included a revolving door of national retailers, new construction, downward pressure on lease rates, and uncertain consumer confi dence headed into the big back-to-school and hol-iday shopping seasons.

Th e market has not unfolded as predict-ed, explained David Houge, retail special-ist with Tucson Realty & Trust. Merchants that were ready to move ahead with growth plans didn’t.

“All systems were go for 2011 with many retailers poised to take advantage of the downturn, but things were put on hold or delayed,” Houge said.

Alan Tanner, fi rst vice president at CB Richard Ellis, characterized the market as “stuck in neutral.”

Although the sector had strong net ab-sorption of 271,031 square feet in the sec-ond quarter, the vacancy rate improved only slightly to 8.6 percent from 8.8 percent in the fi rst quarter.

According to the CoStar Tucson Retail Market Report, the submarkets encompass-ing downtown Tucson and the central east and west have lost the most tenants. Since the beginning of the year, more than 173,000 square feet of space was vacated. Year-to-date, net absorption for the entire retail market was positive by 143,104 square-feet.

CoStar showed a second quarter rate of $14.71 per square foot. Th e fi rst quarter cost was $14.97 per square foot. Over the past year, average rental rates have dropped 6.6 percent.

Th e dip in rental rates “was a likely driver in the acceleration of leasing activity,” said Greg Furrier, principal of Picor Commercial Real Estate Services. “In contrast to the past few years when rates declined and vacancy increased, this is a positive trend to see ab-sorption improving, which points toward stronger market fundamentals.”

For new construction, Costco Whole-sale’s 140,273 square-foot store was com-pleted as the fi rst anchor in the Tucson Mar-ketplace at Th e Bridges at Interstate 10 and Kino Parkway. Th at increased the retail sec-tor’s inventory to 51 million square feet in 5,236 buildings and 533 centers, per CoStar.

Under construction is 216,661 square-

feet of retail, the largest of which is the 90,000 square-foot Mercedes-Benz of Tuc-son dealership at 6350 E. Grant Road.

Key retails sales included Midvale Plaza, 1650 W. Valencia Road, for $17.5 million. Th at amounted to $190.30 per square foot with a capitalization rate of 8.6 percent. Also North Pima Center, 3571 W. Ina Road, sold for just over $4 million, which amounted to $107.73 per square foot and cap rate of 8.77 percent.

Th e revolving door of national retailers saw Borders and Ultimate Electronics exit Tucson during the fi rst half of the year. Re-tail newcomers include Circus Furniture, Mattress Firm, and Culver’s retaurants. Ma-jor expansions were completed by PetsMart, LA Fitness and Staples.

“Th ere continues to be healthy compe-tition from big box tenants, national retail chains and strong local merchants vying for premium sites in high-traffi c areas,” said Houge.

Amid this growing demand for space, ex-isting retailers will continue to consolidate and right-size, added Tanner. Tenants are making “the fl ight to quality, to relocate to better trade areas.”

Projections of local, net job losses cloud the area’s economic outlook. Th e University of Arizona has estimated that 1,700 jobs will be lost in Tucson in 2011.

Tanner, like most experts, feels the mar-ket is dragging bottom.

Clearly, the give and take in retail real estate has made everyone cautious. Fur-rier thinks that will lead to an “active third quarter because of a pent-up demand for space.”

At year-end, Houge’s view is the retail market will end fl at or slightly better.

“We can all see positive and negative signs in the market, although it may be harder to focus on the positives. Landlords will off er concessions for the right tenants and use and lease rates will continue to trend upward slightly,” he said.

As tenants jockey side-ways and up for better deals and locations, overall store openings should outpace store closures.

Contact real estate reporter

Roger Yohem at ryohem@

azbiz.com or (520) 295-4254.

Landlords, tenants play give-and-take for retail spaceRETAIL

Lucky Wishbone, 10 N. Swan Road, added 3,000 square feet of user-owned space in January.

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At 90,000 square feet, Mercedes-Benz of Tucson has the largest retail project currently under construction. G

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By Mick Cluck

Th e Tucson residential land market con-tinues to limp along. Sales have declined 53 percent compared to the fi rst six month of 2010. Th e volume of 38 sales is identical to the fi rst six months of 2009.

Th is anemic activity can be attributed to several factors.

First, our market already has moved through a signifi cant number of foreclosed and troubled assets. Many prime parcels are being held for development and/or resale.

Second, available housing stock values have declined signifi cantly in the last 12 months. Th erefore, it will be longer than ex-pected before we start building homes in Pima County. Many people like the aspect of a new home, however, it is a fi nancial decision driven by aff ordability.

Increases in basic commodities and only a modest drop in labor costs also are making it diffi cult for homebuilders to compete with existing inventory. Financial institutions are holding record numbers of residential prop-erties and vast troubled loans that may turn into bank real estate owned properties.

Although Trustee Sales are trending down, that could change. Our job market is not im-proving and the cost of living is in an upward trajectory.

Th ere also are several decertifi ed subdivi-sions that make fi nancing diffi cult.

Residential building permits were 893 through July. In 2010, there were 1,862 per-mits. Looking back, we had close to 12,000 permits at the peak.

Th is illustrates how deep this recession has been for companies and individuals in the construction industry.

How many businesses could stay open

if some 85 percent of their business disap-peared?

During the fi rst six months, there have been 10 sales in excess of $1 million. Of note was the $4.1 million assemblage purchase west of the University of Arizona campus that will be student housing. Sales less than $1 million for production residential land totaled 23.

Per the real estate analysts at CoStar, there are 50 parcels on the market in excess of $1 million. Between $100,000 and $1 million, there are 23 properties.

Sales year-to-date consist of an uneven

With anemic sales, parcels available from $1M to $14MLAND

distribution of fi nished and platted lots and raw land. Sales of fi nished lots range from $30,000 to $60,000-$80,000 per lot for superior well-located sites.

Some high-end subdivision lots are trad-ing in the $100,000 range and there will be some phenomenal opportunities in this area for cash buyers into 2012.

For commercial land, there were three year-to-date sales over $1 million and 15 sales less than $1 million. Currently, there are 11 properties in escrow priced from $170,000 to $4.4 million.

Also per CoStar, there are 336 parcels for sale between $100,000 and $1 million and an additional 233 priced between $1 million and $14 million.

Commercial development is driven by residential and job growth. Th erefore, I see very little positive change in this segment for several years.

For good news, residential loan rates are around 4.5 percent for a fi xed 30-year loan. Th is is a 1.5 percent decline from a year ago. Home prices are bumping along the bottom. I do not think they will go much lower primar-ily due to the cost of developing this product.

Low prices combined with great interest rates make it a great time to buy residential real estate whether for investment or a place to live. I expect the second half of 2011 to mir-ror the fi rst half and think we will fi nish the year with about 1,460 permits.

Mick Cluck, who began his career in 1976, is an associate broker and land specialist with Tucson Realty & Trust. Contact him at [email protected] or (520) 577-7000.

Wal-Mart has purchased an 18-acre parcel at The Bridges for $4.4 million.

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Offi ce market slowly inches toward recovery, stabilization

OFFICE/MEDICAL

By Roger Yohem

Inside Tucson Business

Square foot by square foot, Tucson’s of-fi ce market is slowly inching toward recov-ery. With 23.3 million square feet of space in play, there are some emerging signs the fundamentals of supply and demand are rallying.

“Th e departure of homebuilders and al-lied services, many who left the market or consolidated in Phoenix, put a great deal of offi ce space on the market during the downturn,” said Tom Knox, a principal at Picor Commercial Real Estate Services. Th erefore, market analysts believe when Tucson’s economy begins to heal, the re-gion will be less dependent on real estate than in past expansions.

“Th e fundamentals indicate we are at or approaching the low point in occupancy and rent defl ation,” Knox said.

Th e current vacancy rate is 12.5 percent, unchanged since the start of the year.

During the second quarter, net absorp-tion for the overall offi ce market was 16,150 square feet. Th at compares to negative 26,293 square feet in the fi rst quarter. At mid-year, the sector stands at net negative absorption of 10,143 square feet, according to the CoStar Tucson Offi ce Market Report.

Geographically, the largest losses were in the central and downtown Tucson sec-tors where about 92,000 square feet of space has been vacated since January. Th e most growth was in the Oro Valley-north Tucson submarket at 68,500 square feet, according to CoStar.

“Th e offi ce market, which is highly de-pendent on employment, needs hiring to pick up in order to see any measurable growth,” said David Montijo, fi rst vice presi-dent at CB Richard Ellis. “Net eff ective rents appear to have stabilized, however, the real story is the increase in tenant improvement dollars and other concessions being funded by landlords.”

At mid-year, the average asking rental rate for the overall sector was $19.12 per square foot per year. Th at is only a two-cent decline from the fi rst quarter, CoStar re-ported. Current Class-A space was quoted at $21.85, Class-B at $19.33, and Class-C at $15.47.

Capitalization rates are now at 8.45 per-cent, compared to 8.7 percent a year ago.

“Getting a lease or sale fi nalized is very continued from Page 12



By Roger YohemInside Tucson Business

Steve Cohen’s analysis about the health of Tucson’s industrial sector doesn’t pull any punches. In summarizing the data, the the Picor Commercial Real Estate Services executive proclaimed “Tucson’s return to market equilibrium remains out of reach.”

Job creation is dismal. Industrial build-ing owners have no motivation to sell at de-creased values. Issues such as government debt, healthcare and taxes “ripple locally to cause uncertainty and lack of market mo-mentum.”

What so little momentum, the sector is actually going backwards, according to the CoStar Tucson Industrial Market Report.

Tucson’s industrial sector ended the second quarter with a 10.7 percent vacancy rate. Th e fi rst quarter mark was 10.6 per-cent. At the end of 2010, vacancies stood at 10.3 percent.

Second quarter net absorption was neg-ative 1,740 square feet, dragging down the year’s total to just over 143,000 square feet of newly vacated space. Geographically, the biggest losses were in the southwest-airport sector at negative 75,688 square feet and the Palo Verde sector at negative 32,752 square feet.

Th e north Tucson-Oro Valley sector saw the largest gain, pick-ing up 39,566 square feet in tenants. Overall, the region has 2,460 industrial buildings with 38.8 million square feet of space, according to CoStar.

Rental rates fell during the quarter, from an overall av-erage of $6.61 per square foot early in the year to $6.57 per square foot now. Th e cap rate, now at 7.5 percent, has been in a steady decline for 18 months.

“Concessions have been free rent and/or paint and carpet refurbishments due to the short terms required by tenants,” said Terry Lavery, industrial specialist with Tuc-son Realty & Trust. “Owners are avoiding adding to a losing equity position.”

Despite the drops in occupancy and rent rates, Robert DeLaney, vice president at CB Richard Ellis, pointed to “a general uptick” in activity.

Manufacturing and building material companies are making moves as they “con-tinue to right-size their space requirements,” he said. Great Western Building Materials,

Lack of job creation, more vacant space pushes sector backwardINDUSTRIAL

continued from Page 12 Geo

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The industrial sector’s largest new

project is Sargent Controls at 70,000

square feet. Shown above, Arnelio Silva works on the new entry.

At right, American Realty Capital

Trust purchased the old Texas

Instruments offi ce for $32 million.



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diffi cult. Giving away endless concessions will not necessarily make the deal work either. We have seen deals signed by the landlord fi rst with a lot of concessions and then the tenant disappears,” said Mike Gross, offi ce specialist with Tucson Realty & Trust.

Th e largest lease signings in the region so far this year include:

• 22,090 square feet by the nonprofi t La Frontera at 4891 E. Grant Road.

• 14,405 square feet by Easter Seals Blake Foundation at 6420 E. Broadway.

• 11,743 square feet by Ridgetop Engineer-ing at 3580 W. Ina Road.

Year-to-date, only two new offi ce build-ings were delivered. Th e largest was Sundt Companies 47,500 square-foot corporate headquarters at 2015 W. River Road. Also, University Medical Center Radiation built a 13,566-square-foot offi ce at 1881 W. Orange Grove Road.

“New construction is limited to specifi c build-to-suits for specialized tenants with unique requirements. However, Tucson’s of-fi ce inventory is aging and eventually new product will be needed,” said Montijo.

At mid-year, 256,800 square feet of new space was under construction, led by the 170,000 square-foot headquarters for UniSource Energy at 88 E. Broadway.

Th e most notable sale was the Texas In-struments building at 5411 E. Williams Blvd. American Realty Capital Trust purchased the offi ce for $32 million from Bourn Compa-nies. Most other sales have been bank-owned properties.

When analyzing submarkets, Picor’s Knox noted that the medical sub-sector is the stron-gest. Demand for leased space has been inch-ing forward steadily “fueled by an aging popu-lation, longer life spans, and active seniors.”

For new construction, Tucson Medical Center plans to open its new $100 million, 207,000-square-foot orthopedic center and surgery pavilion by mid-2013.

Going forward, Montijo said larger tenants are active in the market, “taking advantage of lower rents to right-size their businesses or upgrade their space.”

Th e market’s future is improving although the recovery is much more methodical than in past downturns.

“Still, the battle will be to fi nd aff ordable fi nancing or to just fi nd fi nancing and an ap-praiser that totally understands the market and what is being sold,” said Gross. “To get their price and properties sold, sellers may want to consider an owner carry-back with an acceptable stop.”

Knox added that many buyers “are still on the sidelines,” waiting for more distressed pur-chase opportunities. Lenders recognize this and seem to be working harder to keep bor-rowers in place.

“Th e occasional asset will move via foreclosure and trustee’s sale, but no sig-nifi cant inventory or sizeable portfo-lios are expected to turn over,” he said.



OFFICE continued from Page 10

for example, leased 15,387 square feet at 1501 E. 21st St. and S&R Cabinetry leased 9,585 square feet at 2660 E. Ganley Road.

“New construction is primarily build-to-suit projects, most either government-based or use-based,” DeLaney said. Th e largest industrial project is in Marana where Sar-gent Controls is adding 70,000 square feet to its aerospace and defense operations.

Regarding sales, there were few notable transactions. Buildings that changed hands included 1601 N. 15th Ave., purchased for

$975,000 by Crescent Realty Corp., and 2470 W. Majestic Parkway bought by Vin-cent Iacono for $925,000.

At 941 W. Fairview, Western Refi ning Wholesale bought 1 acre of land for $1 mil-lion to build a service station under the Gi-ant brand. In Sahuarita at the northwest corner of Twin Buttes Road and La Canada Drive, 240 acres of land was purchased by Sahuarita Holdings LLC for $1.5 million.

As in all the commercial real estate cat-egories, Bill DiVito, senior vice president of

Grubb & Ellis, said the only factor that will turn around Tucson’s economy is meaning-ful job creation.

“As we move through the bottom of the industrial market, we must keep an eye on employment as a signal for the return of industrial demand,” DiVito said. “Signifi -cant losses since 2008 must be overcome, the task remains of recapturing jobs lost.”



INDUSTRIAL continued from Page 11

Inside Tucson Business - Commercial Real Estate August 2011

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