Market Overview

Positive progress has been made in the commercial real estate market in both Phoenix and Tucson, AZ. Arizona's right-to-work laws, lower operating costs, pleasant climate and attractive lifestyle make it a desirable business destination. Tucson's industrial market's occupancy in larger buildings declined slightly in small business spaces. Rent increases took place in many properties under 3,000 square feet.

Because of Tucson's location near Mexico, Zucarmex-a sugar producer-relocated its headquarters to the area. Several other factors make Tucson attractive to many businesses. It is not only near Mexico, but also Texas and California. Two major suppliers and an aerospace manufacturer were among the largest lease signings for the fourth quarter of 2014.

In Phoenix, industrial space is used in so many different ways that identifying qualified logistical location is only the first step in fulfilling a business' physical and technical needs. Building location, clearing height, loading requirements, utility capacity, column spacing and slab capacity are among the conditions considered by relocating businesses. Local help is available to identify specific needs and accommodate any company's industrial objectives.

Flex office space crosses between office and industrial business needs. In Phoenix they open up to additional categories of flex/office and flex/industrial areas. They serve an ever more important role in the suburban commercial markets. These structures are usually single story properties providing direct tenant entrances into their spaces. They reduce operating costs and are leased on a "net" square footage basis.

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Many times the specific needs of a company cannot be accommodated within current or future space inventory in Phoenix or surrounding markets. The business must then decide to construct a building that meets its needs. They can then own the building or lease it back from an investor. Many local realty companies assist tenants, owners and users in accomplishing their build-to-suit qualifications.

Investments

There has been a slowdown in lender-owner inventory. Smaller companies have seen more favorable activity with most transactions in the 2,000-32,000 square foot range. The few investment sales that were made in Tucson covered a wide range of prices per square foot, but all of the sales cost well below the expense for building replacement.

Retail properties in Phoenix represent one of the most sought-after commercial real estate investments. They carry greater risks, so a balance must be calculated between the risk and the reward to both seller and buyer. Outparcel sales and purchases of properties within established shopping centers are also currently desirable. Assessing the parcel's value from both sides, while analyzing the most beneficial transaction should be well thought out. Then the purchase will prove beneficial to the buyer for years to come.

The Job Market

Job increases in Tucson have lagged behind the national and state averages which has made job creation the most pressing demand. In the first quarter of 2014 local unemployment was 6.6%, while the state as a whole averaged 7.3% and the national rate was 6.7%. Jobs in Phoenix have maintained a 2.9% growth rate in 2014, adding 54,712 new jobs. Health Services and Education maintained consistent growth, adding 12,362 new jobs. Business and Professional Services accounted for 18,294 new jobs. Only the construction industry saw job losses, decreasing by 3,002 jobs over the year.

Outlook for the Future

The positive trend is likely to continue into 2015 with slight increases over time. Interest from larger users of industrial apace-such as defense industries, other public agencies, logistics and trade oriented users-should increase momentum.

The demand for medical space will see increases due to the Affordable Care Act increasing the number of citizens with insurance and the aging of the population in general. Behavioral health tenants have particularly increased in the Tucson market.

The trend among tenants in Tucson is to move into higher quality space even if it means taking smaller quarters. Average sale price to small users was $102 per square foot. New technology and improved worker productivity have made such changes possible. Due to limited demand of small to mid-sized leases and rentals, high quality buildings have a lot of space available offering a variety of options.

Lease conditions and terms vary widely in Phoenix based on type of building and location. Many companies have shown interest in establishing or relocating in the area because of the range of properties and leasing options currently available. A positive outlook for continuing increases in commercial property sales and leases seems assured.