Inside Tucson Business Commercial Real Estate 8/9/10

2010 MID-YEAR UPDATE

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COMMERCIAL REAL ESTATE

By Roger Yohem Inside Tucson Business

Despite some encouraging economic signs, the commercial real estate industry is still desperately seeking stability.

At the midpoint of 2010, local and national industry experts agree that the worst misfortunes of the Great Recession appear to be over. For the near future, over-all vacancies will continue to rise and rental rates will continue to slide in all sectors.

Sustainable improvement throughout the entire industry is not expected until mid-2011. Commercial sector analysts for the National Association of Realtors fore-

cast that office space positive absorption will not occur until then. In the industrial category, obsolete facilities will linger on the market the longest.

Nationally, retail vacancies are expected to stabilize in the first quarter of 2011, then hold steady and increase slightly during the rest of the year, the National Association of Realtors reported.

Every year through 2015, PricewaterhouseCoopers, a New York-based professional services company, proj-ects that $250 billion to $300 billion in com-mercial real estate loans will come due.

Not all notes coming due will default; some owners will successfully refinance.

Others will find buyers. Some will negoti-ate with their lenders on short sales. But overall, PricewaterhouseCoopers projects that commercial property foreclosures will accelerate. When that happens, cash-rich investors will buy bank-owned properties at reasonable prices.

With guarded optimism, positive signs are giving hope for meaningful improve-ment next year.

Reports in this Mid-Year Update were provided by CB Richard Ellis, Grubb & Ellis, Pi-cor Commercial Real Estate Services, and Tucson Realty & Trust. Contact reporter Roger Yohem at [email protected] or (520) 295-4254.

Mid-Year Special Report: Overview

Commercial real estate desperately seeking stability

www.azbiz.com COMMERCIAL REAL ESTATE | AUGUST 9, 2010 3

COMMERCIAL REAL ESTATE2010 Mid-year update: Industrial sector

By Robert Davis, William DiVito and Howard Kong, Grubb & Ellis Special to Inside Tucson Business

The long descent to the bottom of indus-trial real estate hasn’t been fun.

Historically, Tucson follows behind national trends by two to three quarters. National statistics have shown some spark and there is talk of “the flicker of an uptick” and “a nascent recovery.” These indicators point to healthier times on the horizon for Tucson.

Nationally, we experienced our first quar-ter of positive absorption in the second quar-ter this year after seven quarters of negatives. There was a minimal amount of new supply and new construction was limited to build-to-suit projects.

For vacancy rates, national figures dropped slightly: about 30 basis points after two years of increases. Rental rates contin-ued their downward trend although they seem to be leveling off. Asking-rates are nearing the low of the last cycle, recorded in the 2004 fourth quarter.

These days, it’s like living in a flooded house - with the flood being vacant space. The flood doesn’t seem to be receding. The good news is, we have finally turned off the water. Be patient, the flood will subside, slowly.

Another way to frame recent events as good news is the reality that we are very close to a turn-around. Looking back over the last 13 quarters, Tucson recorded only two posi-tive quarters of net absorption.

During the second quarter of 2010, negative absorption was 79,000 square feet. That was a 20 percent improvement over the previous quarter, and a huge improvement compared to 757,600 square feet of negative absorption dur-ing the worst period of the recession that occurred in the 2009 first quarter.

Since the recession began, the effect of 30,000 lost jobs has increased the vacancy rate to 11.2 percent. Although vacancy has jumped by 7 percentage points since the 2007 first quarter, with the majority of the increase from the first quarter of 2007 to the fourth quarter of 2009, the increase has only been 40 basis points over the past four quarters.

Any good news there? Absolutely. The vacancy slide is subsiding as the rate of decline is softening. This suggests that we’re hovering

near the bottom and poised for a rebound.Finally, local rental rates appear to be sta-

bilizing. After a 23 percent drop over the past two years, we do not foresee further signifi-cant rental rate compression. With vacancies flattening, absorption being up and no new construction to speak of, no indicators point to further declines.

So the good news is, we have already taken the hit.

All the signs are undeniable: we have bot-tomed out. Over the next two quarters, the market will continue to stabilize. It’s not time to celebrate, but it’s not hopelessly dire.

Consider that there is a lot of vacant indus-trial space available at historically low rents. We are closing in on 2004 pre-bubble asking rates. And if asking rates drop just another 5 percent, we will be back there. It’s almost like somebody hit the reset button.

If you are a user looking to act at the bot-tom of the market and capitalize on histori-cally low rental rates, now is the time to take action. If there is available space that meets your requirement, secure it before it’s gone.

For the bread-and-butter economy, Tucson has always been fast to correct. When the economy improves, we will adjust quickly. Local economists are projecting two years to recovery, but it may be sooner than that.

For accelerated, additional lift, look to pockets in the market that will continue to fare well in spite of the recession: such as life sciences, big pharma and biotech. These industries will continue to flourish and bring positives to the community beyond the actual real estate component, like much-needed high-paying jobs.

Keep an eye on the growing northwest biotech corridor stretching from the new University of Arizona Bio5 labs, Honeywell, Innovation Park to Biosphere 2.

This corridor provides a pristine campus setting with existing critical mass, the strengths these companies need to attract world-class talent and the ability to compete in the bio-tech race that so many cities desire.

Industrial report by Grubb & Ellis from Robert L. Davis, senior vice president; William DiVito, senior vice president; and Howard Kong, vice president. Contact: (520) 321-3338 or [email protected].

Hovering near the bottom and poised for a strong rebound

The Arizona Sash & Door building at 401 E. Irvington sits vacant after the company left in January.

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INSIDE TUCSON BUSINESS4 AUGUST 9, 2010 | COMMERCIAL REAL ESTATE

Commercial Offi ce Buildings continued on page 9


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COMMERCIAL REAL ESTATE2010 Mid-year update: Land sector

Finished residential lots in good locations sell at a premium price By Mick Cluck, Tucson Realty & Trust Special to Inside Tucson Business

Although the land market is still limp-ing along in Pima County, there have been a number of sales in the first half of 2010.

The good news is sales of residential, finished production lots have picked up. The availability of finished lots has decreased significantly, which will eventu-ally foster more interest in platted product.

Builders and investors will continue scooping up the remainder of finished lots at great prices in the next 12 months. Already, there have been several sales to end-users by investors who resold lots they purchased in 2009 at fire-sale prices.

Lending institutions are still carrying significant non-performing assets on their books and many of these parcels will hit the open market in the next year. A wild-card in the mix are several large residential subdivisions in various stages of develop-ment that are mired in lawsuits.

Another indication of the demise of the land market is the record number of parcels with delinquent real estate taxes. The largest purchasers of delinquent taxes at the last auction were two of the country’s largest banks: J.P. Morgan and Bank of America.

Home foreclosures were 29 percent of re-sales in May. This puts downward pressure on pricing for new and existing homes. Monthly absorption has reached a point where build-ers are trying to boost volume by increasing the number of open communities.

Well-located, finished lots are trading at a premium with multiple offers on the very best tracts. This includes unfinished lots where the seller will build and buyers will close in bulk. If sellers are willing to build the lots, buyers are willing to pay a premium since they don’t take the risk of development cost overruns.

Since bank financing is very hard to get, rolling options are still very popular.

Recent housing sales have fallen due to the end of the tax credit incentive. Locally, this incentive and low interest rates afforded renters the opportunity to own a home for $40 a month more than the rent on a standard two-bed-room apartment.

Since January, there were 28 land sales between $1 million and $24 million. The largest purchase was Freeport McMoRan Copper & Gold’s purchase of 3,500 acres in Sahuarita for $24 million.

For the first time in a while, there were a number of raw land sales. Per CoStar, 311 fin-ished lots closed at price-per-front-foot ranges of $640 to almost $1,500. The majority of sales were in the northwest part of Tucson.

A number of custom home lots in high-end subdivisions closed at bargain-base-ment prices. One bulk sale closed at $117,000 per site, which would not cover current land development costs. Currently, there are 49 active residential parcels on the market in excess of $1 million, and one pending sale, according to LoopNet.

Unfortunately, the other source of local land transactions has been bank foreclo-sures and deeds in lieu of foreclosure.

Since the economy is still sour and businesses are still focused on reducing costs, there has been little activity in the commercial land market. There have been 13 sales ranging from $1 million to $9 mil-lion. Currently, there are nine transactions pending, per CoStar. Properties being actively marketed total 149 and range in price from $1 million to $15 million.

In the last 12 months, about 2,000 new homes sold in Pima County. I think sales will decline by 15 percent in the next 12 months.

Currently, there are about 4,500 finished lots in standard production widths in Pima County. These lots are priced from $40,000 to $48,000 and probably will increase to the $60,000 range in the next 12 months.

Tucson Electric Power’s new “line exten-sion policy” adds $3,000 to $5,000 to each new lot being developed. This, coupled with other

utility hook-up costs and impact fees, will bring real value to an already-shrinking inventory of fin-

ished lots.The main factors that will deter-

mine the land market’s status in the next 12 months will be the severity of

commercial property foreclosures, inter-est rates and unemployment rates. As I have maintained for years, Tucson is still a great city to live in and invest financially.

Land sector report by Tucson Realty & Trust. Information submitted by Mick Cluck, Land Specialist. Contact: (520) 577-7000 or [email protected].

very best tracts. This includes unfinished lots where the seller will build and buyerswill close in bulk. If sellers are willing to build the lots, buyers are willing to pay a premium since they don’t take the risk of development cost overruns.

Since bank financing isvery hard to get, rolling options are still very popular.

Recent housing sales have fallen due to the end of the tax credit incentive. Locally, this incentive and low interest rates afforded renters the opportunity to own a home for $40 a monthmore than the rent ona standard two-bed-room apartment.

Tucson Electric Power’s new “lision policy” adds $3,000 to $5,000 to lot being developed. This, coupled w

utility hook-up costs anfees, will bring real valalready-shrinking invent

ished lots.The main factors that w

mine the land market’s statnext 12 months will be the se

commercial property foreclosurest rates and unemployment rahave maintained for years, Tucsongreat city to live in and invest finan

Land sector report by Tucson LTrust. Information submitted by MicLand Specialist. Contact: (520) [email protected].

A new line extension policy will increase the cost of housing.

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2010 Mid-year update: Offi ce/Medical sector

Tenants benefi t from rent and tenant improvement concessions are reaping the harvest of a depressed mar-ket and gaining significant rent and tenant improvement concessions.

What is the demand for ownership?The market for office investment proper-

ties has been very quiet through the first two quarters of 2010. Ownership of small, owner-user office buildings also is depressed and prices for shell buildings have dipped below $170 per square foot.

Are there bright spots in the office market?

Reflecting the expanding demand for health services, the medical office market is

relatively robust. Practices are growing even in the face of healthcare reform and possi-ble reductions in Medicare reimburse-ments.

In comparison to year-end 2009, Tucson’s current office vacancy rate remains stable at 12 percent. Net absorption has improved modestly and rental rates continue to soft-en, according to data from the CoStar group in its mid-year 2010 report.

Generally reflecting national economic conditions, Tucson’s commercial office market has been flat for eight quarters. New construction has been limited mostly to

owner or built-to-suit activity.The only multi-tenant office that was

under construction was the 40,000 square-foot project at 3501 E. Speedway Blvd., a building that was 50 percent pre-leased. Sundt Corp. is completing its $8.6 million, 50,000 square-foot headquarters at 2015 W. River Road; and UniSource Energy Corporation has commenced work on its new $60 million, 170,000 square-foot headquarters building in the downtown central business district.

A new first-class research facility was completed for Sanofi-Aventis at 2090 E.

By Richard Kleiner and Th omas Knox, Picor Commercial Real Estate Services Special to Inside Tucson Business

When considering the current status of Tucson’s commercial office market, the circumstances clearly are full of haze and uncertainty. That’s why we start by posing these questions:

Is the market static or gradually improving?

Tucson’s office market reflects this uncertainty. The lease market is by far the strongest in terms of activity. Tenants

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The completed Monte V Corporate Center, built by Chestnut Construction and owned by brothers Al and Daniel Kivel, is the fi rst new Class A offi ce

building in Tucson in over 10 years.


COMMERCIAL REAL ESTATEInnovation Park Drive in Oro Valley. Sergeant Controls will build a 70,000 square-foot expansion project at Continental Ranch in Marana.

Tenant demand for space in all property types has been subdued and rents for office properties continue to decline.

Limited financing options that were avail-able to small business created dramatic downward pressure on pricing of all property types, but perhaps most significantly in the category of condominium office space. Lower rents and generous landlord concessions have caused the “lease versus own” calcula-tion to swing back in favor of tenancy.

Healthcare and education have been active market segments. Several significant leases have been completed for education facilities with expansions of Tucson College, Brown Mackie College, Embry-Riddle Aeronautical University, and the Academy of Tucson.

Tucson Medical Center has seen contin-ued absorption of medical space in the Tucson Medical Park, a 37-acre parcel just south of the hospital on 5301 E. Grant Road. TMC intends to commence construction of a new 60,000 square-foot medical office building, at its campus north of Grant Road, by the first quarter 2011.

The 37,000 square-foot third floor of El Dorado Hospital, 1400 N. Wilmot Road, recently was leased to an operator of a pedi-

atric, long-term health care hospital. The vacant second floor is also under negotia-tion with an operator of a skilled nursing facility.

Institutional owners are offering signifi-cant near-term rent reductions and improvement allowances. The central mar-ket is Tucson’s largest concentration of office space, identified as “the Broadway Corridor” from Country Club to Wilmot roads. This sub-market shows an 8.9 per-cent vacancy and average rents of $22.87 per square foot.

Typical of the competitive market in mid-town, lease renewals have fallen about $2 or more into the $17 gross per square foot range. Rent abatements and tenant improve-ment allowances also are common.

There are still many reasons in this mar-ket for participants to be nervous and cau-tious. However, we are seeing a bit more sales and leasing activity in the recent peri-od. This is primarily due to the exceptional opportunities available to those buyers and tenants willing to take action.

We believe landlords must take the long

view and adopt an aggressive pricing struc-ture to attract or retain tenants and gain the attention of market participants. Economic conditions suggest it will be several years before we can expect a normally vibrant office marketplace to return.

Office/medical report by Picor Commercial Real Estate Services from Richard Kleiner, Principal; and Thomas Knox, Associate Broker. Contact: (520) 546-2745 or [email protected].

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Oro Valley may become known as biotech valleyBy Hank StephensonInside Tucson Business

The town of Oro Valley has found a win-ning formula for bringing high-tech, high-pay jobs home: be responsive to business-es and they will come.

Innovation Park is the technological hotbed of Oro Valley. In the last decade, it has grown from 565 acres of empty desert, into the industrial home for much of Southern Arizona’s biotech industry.

“It’s changed significantly since we moved out here almost 10 years ago,” said Gregg Forszt, director of facilities at Ventana Medical Systems Inc., the largest biotech company in Oro Valley. “There was nothing out here.”

Now there is something. Forszt has no problem listing off the companies that have moved their operations to Innovation Park in the last decade, most of which have some kind of tie to the University of Arizona.

That includes Ventana, 1910 E. Innovation Park Drive, which provides tis-sue-based cancer diagnostics and employs more than 1,000 people in their Oro Valley facility.

Ventana was the first biotech company to build a facility in Oro Valley. Their sev-en-building 350,000 square-foot campus includes a research and development department, manufacturing facility and even a cafeteria.

Swiss pharmacy giant Roche Holdings spent $3.1 billion to acquire Ventana in 2008, but the company was created by former University of Arizona professor Dr. Tom Grogan, who is now the senior vice president of medical affairs at the company.

Another major player, Sanofi-Aventis, is a drug research and manufacturing com-pany that employs about 100 people at their Oro Valley facility.

The Tucson arm of Sanofi-Aventis grew out of a startup chemical compound research company formed by faculty of the University of Arizona in 1990.

They cut the ribbon to their state-of-the-art 110,000 square-foot facility at 2090 E. Innovation Park Drive in January.

Oro Valley is also home in part to the University of Arizona - which purchased the former Sanofi-Aventis’ site at 1580 E. Hanley Blvd. for drug research and a busi-ness incubator - Oro Valley Hospital and several smaller biotech companies.

“I think the important thing to recog-nize is what’s happening in Oro Valley is truly home-grown,” said Ken Wertman, the scientific site director of Sanofi-Aventis.

Wertman said it’s this link to the univer-sity, and the qualified employees it cre-ates, that has made the biotech boom in Oro Valley possible.

“The key to growing (the biotech indus-try) locally is fostering it locally, and that’s principally through the University of Arizona, Arizona State University or Northern Arizona University,” Wertman said.

Besides the university, you need a busi-ness-oriented government to help foster growth in the industry, said Forszt.

A decade ago, when Ventana decided to build their facilities in Innovation Park, there were no roads, no gas and no water to the area. The town helped develop the necessary infrastructure and expedited permitting to build the facilities, said Forszt.

“I think that’s a big reason people are moving up there, because the town is able to take businesses from dirt and get them into buildings in here a little bit quicker than most places,” he said.

With the current town council and mayor, the business climate has never been better for high-tech companies look-ing to start up in or move to Oro Valley, Forszt said.

Oro Valley’s mayor, Satish Hiremath, said he would like to take the credit, but he’s relatively new to the job. He said the biotech industry is extremely important to the town because it attracts the type of white-collar worker that can afford to live in Oro Valley. The main role the govern-ment can play, he said, is as a responsive entity with an open door policy.

Though the town can’t do too much in the way of tax incentives, they can help by

streamlining the development process and taking over maintenance of roads, for example, that the companies have built.

He said success begets success. Because Oro Valley has bioscience companies with trained workers, and the University of Arizona nearby, they are able to offer a local pool of talent for potential employers to pull from.

Nevertheless, no business incentives in the world can lure employees to a place they don’t want to live, said Wertman, and that’s why Oro Valley has been able to attract business – the beautiful weather and the good schools in the Amphitheater School District.

“It’s about building an environment in which professionals want to live,” he said.

Hank Stephenson is a Tucson-based

freelance writer.

n door policy. wn can’t do too much inentives, they can help by

Hank Stephenson is a Tucson-based H

freelance writer.

Biz FactsVentana Medical Systems1910 E. Innovation Park Drivewww.ventanamed.com

Sanofi -Aventis2090 E. Innovation Park Drivewww.sanofi -aventis.us

Gregg Forszt, Director of Facilities at Ventana Medical Systems, right, has seen vast growth to the company’s site in Innovation Park.

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Commercial Offi ce Buildings continued from page 4

Shopping Centers continued on page 10


Shopping Centers continued from page 9

FOR AN EXPANDED SHOPPING CENTER LIST, VISIT WWW.AZBIZ.COM/BOOKOFLISTS


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COMMERCIAL REAL ESTATE2010 Mid-year update: Retail sector

Opportunities, activity abound in Tucson’s “under-retailed” market By Nancy McClure, CB Richard EllisSpecial to Inside Tucson Business

It’s no secret that retailers have been hard-hit by the downturn in the nation’s economy. Cutbacks in consumer and busi-ness spending caused many to downsize operations or close stores entirely.

Yet despite the economic gyrations, Tucson’s retail market has fared better than other similar-sized communities across the country. There is considerable upside to talk about at mid-year.

The big news is activity. There is a healthy appetite of national retailers look-ing at Tucson. New entries this year include the Burlington Coat Factory, Ultimate Electronics, REI, Cheesecake Factory, and QuikTrip.

Expanding retailers include:• Walmart: Demolishing the former

Macy’s store at El Con Mall and rebuilding by mid-2012.

• Costco: Coming to the Kino/I-10 area in March 2011.

• Nordstrom Rack: Opening across from Tucson Mall in fall 2011.

• BJ’s Restaurant & Brewhouse: Opened its second location near Park Place Mall.

• Five Guys Burgers and Fries: Debuting at Campbell Plaza this year with plans for more restaurants within 12 months.

• CiCi’s Pizza: Searching for several new locations.

• H & M: This high-end Swedish cloth-ier opens at Tucson Mall this month.

• Party City: Repositioning from the northwest to the southeast corner of Craycroft and Broadway.

So why is this marketplace so hot? Because Tucson was never “over-retailed.”

While Tucson’s population has topped one million, it’s still considered a “tertiary” market and undergoes higher scrutiny from expanding retailers, as well as lend-ers providing retail developers with fund-ing for new construction.

New retail construction has dropped dramatically from 1.4 million square feet in 2008 to virtually zero. No shopping cen-ters have been completed in 2010 and permit activity does not indicate that any new centers will start this year.

In the absence of new construction, the surge of national retail bankruptcies and store closings between 2008 and 2010 has created opportunities in many coveted trade areas surrounding regional malls.

Besides some big boxes shuttering, the closure of eight Hollywood Video and two Blockbuster stores also opened up good locations. For retailers in a position to expand or enter Tucson, these spaces pro-vide prime retail positioning that hasn’t been seen at any time in the last 10 years.

Amid the activity, vacancy is showing signs of stabilization. The current vacancy rate is 12.2 percent, slightly higher than the 11.9 percent at year-end 2009 but essen-tially unchanged.

In the next six months, we can expect some increase in the overall vacancy rate,

but not at the velocity experienced over the past 18 months.

Absorption also is showing signs of improvement. After a record loss of over 522,000 square feet in 2009, only 87,000 square feet of negative absorption was recorded in the first quarter 2010; followed by positive absorption of 24,792 square feet in the second quarter.

Given the activity level and how soon deals can be made, positive absorption should continue—albeit in small incre-ments—through year-end.

While portions of the market appear to have stabilized or are showing signs of improvement, recovery of some sectors remains stalled, especially in the city’s peripheral areas.

Lease rates have declined and will con-tinue to do so over the next six months as some landlords cut rent further in order to fill vacancies. The only exception is excel-lent, well-located real estate, which will continue to command and get good prices. The current average asking lease rate is $17.75 per square foot.

Whether a retailer will do well today is based on appeal, personal services, prod-uct and (importantly) price point. Furniture stores, for example, have been hard-hit, impacted by the lack of housing growth. Several restaurants also have closed, as more consumers are eating in.

Among apparel retailers, only the dis-counters are doing any expansion.

For local merchants, it’s a mixed bag. While some are struggling to stay open, oth-ers are capitalizing on better locations. For both, the next test will be the critical back-to-school season, which the International Council of Shopping Centers predicts year-over-year sales will rise 5.4 percent.

As a key indicator for holiday shopping, if this holds true, the retail market can look forward to a better year-end 2010 as the economy slowly improves.

Retail report by CB Richard Ellis from Nancy McClure, first vice president. Contact: (520) 323-5117 or [email protected].


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Inside Tucson Business Commercial Real Estate 8/9/10