TUCSON—The Tucson office market is a mixed bag. But thanks to a demand in medical office space, there is some good news. By increasing the number of insured citizens, coupled with a growing aging population, the Affordable Care Act is anticipated to be a key demand driver for Tucson medical space, according to Richard Kleiner, principal with Cushman & Wakefield | PICOR.
“We represent a lot of medical property in town,” Kleiner tells GlobeSt.com, Tucson Medical Center being one entity. “And there is no question about the growth tied to the Affordable Care Act. We're seeing more and more leasing activity in the 2,000 to 20,000-square-foot range in the medical center near the hospital. Practices want to locate closer to hospitals—closer to the center of their universe.”
Lacking significant drivers and scant job growth, the Tucson office lease market ended the first quarter at 12.4% vacancy, up slightly from year-end 2013 and matching its highest mark in this real estate cycle.
“General office has remained lackluster,” says Kleiner. “There have been no drivers so it has been stagnant. Tucson does not experience the high highs or the low lows that Phoenix does. Asking lease rates have declined. We just have not seen that kind of momentum in the market.
Activity resembled a game of musical chairs, with renewals andcontinued downsizings. The trend toward more efficient use of space took its toll on demand for yet another quarter. Tenants traded into higher-quality space, albeit typically into smaller quarters, thanks to technology and improvedproductivity per worker. Rents continued to soften in response to more limited demand, and available options for small to mid-size users in high-quality buildings remained abundant
More positively, 11 office investment sales closed Q1 13 for a total of over $37 million, averaging $121 per square foot. This marked return to purchases for income stream reflected the availability of investorcapital for purchase of quality, well-located property, with values scaled based on occupancy and revenue.
Kleiner cited two significant investor buys. A REIT's purchase of a single-tenant airport-area facility occupied by Raytheon and the local investor purchase of the former MuscularDystrophy headquarters, which will be marketed to multiple corporate users.
“The former MDA headquarters sold for $9.1 million and will be repositioned as class A office space,” says Kleiner. “So we'll have absorption for lease rather than owner-occupied.”
Per usual, Tucson continues with some slow and steady gains.
“Office will gradually improve over time as the general economy improves,” says Kleiner. “But medical right now is where we are seeing the robust activity.”
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