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By Sheila Storm
INSIDE TUCSON BUSINESS
July 27, 2003  

A high vacancy rate continues in industrial space near Tucson International Airport , Christopher Keeley, an industrial specialist with Tucson Realty and Trust Co., said as part of his remarks during a commercial real estate mid-year report last week.

“The airport area hasn’t caught on yet,” Keeley said. He said the vacancy rate in the area stands at 25 percent. He said businesses are looking more to stay along Interstate 10 or in the northwest area, where they are closer to Phoenix .

Small, local players are generating most of the more recent activity in the overall market rather than national players, he said. The overall vacancy rate in the greater metro area is 19 percent.

Interest rates, he said, are continuing to convert building users into building owners. Generally, the owner of the business owns the building and leases it back to the business, he said. “You don’t see a lot of people shrinking (their space),” he said.

But Hank Amos, president of Tucson Realty & Trust, said that is starting to change due to higher bond yields. “We’re a little worried about interest rates increasing,” said Debbie Heslop, a retail specialist with Tucson Realty and Trust. But she said she believes it’s still a “wonderful” opportunity for local retailers to buy their own space.

“Look for ownership opportunities now,” she said. Heslop said local retailers should especially look to find space in the outer limits that are under development and attracting big boxer retailers, such as Kohl’s and Home Depot because they generate traffic. “I would look at Rita Ranch as another opportunity and I-19,” she said. 

She said the national retailers are doing the research and opening secondary locations. “Sprawl is really working in our favor,” she said. She said it’s causing national retailers to have multiple locations and they are looking at infill areas.

Although vacancy rates have increased slightly in the past year for commercial properties and shopping center space, Heslop said it’s largely because of the closing of two Super Kmarts and several grocery stores. However, Lowe’s Home Improvement announced last week, that it purchased the two former Kmart sites.

Heslop said landlords may face more competition for tenants due to new construction projects and the shift in retailers’ interests in developing areas.

Michael Gross, an associate broker with Tucson Realty & Trust, said he’s seen some free rent given out in the office market in recent months, something “unheard of” in Tucson .  Vacancy rates have increased to 14 percent in the past couple of years. “You don’t need to give concessions, but you should,” he said. He said landlords need to factor the loss of a tenant if they don’t grant concessions vs. trying to find a new tenant. 

Typically, he said, you need to be at 10 percent to be in a landlord’s market. The sluggish economy and 9/11, he said, have kept companies from moving into what they consider a “tertiary market.”

But the fact that Tucson is approaching a population of 1 million has kept the vacancy rates from going over 20 percent as they are in Phoenix . “This is also why we don’t have a plentiful supply of larger existing investment properties for investors, which in turn has driven the price of an investment property higher ($110 to $135 per square foot) and the cap rates down (8.75 percent to 9.25 percent).

Gross expects more activity to come to Tucson from California , where businesses are facing higher taxes, higher business costs, higher residential costs, etc.  “We may see an influx of companies coming to Tucson ,” he said.

Sheila Storm, editor of Inside Tucson Business, may be contacted at sstorm@azbiz.com or (520) 294-1200, ext. 121.

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