08 February 2010

Tucson: Speculators Complete 21 Buildings; Vacancies Hit 11%

AZ Biz

Unlike the office market, speculators were active players in the arena of industrial real estate. Throughout last  year, 21 new buildings totaling 741,175 square feet of product were completed, according to Don Ahee of CB Richard Ellis.

The sector ended 2009 with negative absorption, higher vacancy rates, and falling rents. Those factors made the construction of new space seem contrary and defiant of current market conditions.

However, that was not the case, considering the long lead times to get an industrial building designed, properly zoned and permitted by local governmental authorities, and finally break ground.  

"The year registered strong construction numbers for Tucson’s industrial market,” said Ahee. “This marked the first significant speculative construction in this decade.”

The airport submarket added a large inventory of speculative industrial condominiums and buildings. For example, the 40-dock Rockefeller Distribution Center, at 6855 S. Lisa Frank Ave., added 113,546 square feet of distribution/warehouse space.  

Another significant airport-area project was construction of a two-story, 53,750 square-foot building for Alliance Beverage in Butterfield Business Center, north of Interstate 10 between South Palo Verde Road and South Alvernon Way. The warehouse, distribution and administrative facility, on the northeast corner of South Palo Verde Road and Columbia Street, opens this month. The 5-acre site was purchased for $1.2 million from Butterfield Tucson Limited Partnership.

Overall, new industrial buildings completed in 2009 opened with a 38 percent vacancy rate.

As projects in the pipeline were completed, construction activity slowed considerably in the second half of the year. Looking ahead, Ahee sees a “notable decline in building permits.”

Steve Cohen, of Picor Commercial Real Estate Services, pointed out that once investors saw the market turning down 18 months ago, new construction plans were shelved.

Regarding the sale of existing buildings, one of 2009’s major transactions was the $5.3 million purchase of the former KLA Tencor ADE Phase Shift manufacturing building, 3470 E. Universal Way, by the American Red Cross Arizona Blood Services. The 60,000 square-foot building will be used as an administrative headquarters, blood storage and distribution center. The acquisition was $2.8 million below the original asking price.

Chuck Blacher, industrial specialist with Tucson Realty & Trust, said price reductions of 25 to 40 percent were common in 2009 compared to 2008, and he expects they will remain soft this year. That has sparked “some signs of life” in industrial, warehouses, manufacturing facilities, and contractor yards.

Despite some flickering signs of recovery, owners of troubled industrial properties “will find a final day of reckoning and in some cases, lose their properties,” Blacher said.  “Buyers who can write a check are in the front row.”

He noted, for example, $112 per-square-foot sales prices in 2008 have now dropped to $59 per square foot.

Russ Hall, of Picor, noted that industrial building vacancy rates have risen for two consecutive years. After reaching a record low of 5 percent in mid-2007, their analysis showed Tucson’s overall industrial vacancy rate at 10.8 percent. CB Richard Ellis’ data was slightly higher, at 11.7 percent.

Either way, that’s a 100 percent increase in vacant space over a two-year period. Overall, there is approximately 4.5 million square feet of industrial space in the region in buildings larger than 10,000 square feet.   

For warehouses, Picor and CB Richard Ellis recorded year-end vacancy levels that ranged from 12 to 15 percent.  CB Richard Ellis’ Ahee listed the airport submarket at 14.2 percent vacancy, and both firms had manufacturing buildings at about 9.6 percent vacancy.

Picor listed high-tech buildings having the highest vacancy level at 15.8 percent. Despite the ongoing weak economy, vacancy rates in all geographic submarkets in the region are projected to begin leveling off this year. 

To no one’s surprise, the large negative absorption numbers drove down rental rates. As a result, landlords granted rental concessions to keep tenants and negotiated lease extensions with no rate increases, said Blacher.  

Ahee said the average industrial asking rate ended 2009 at $6.36 per square foot compared to $8.28 per quare foot in 2008. Since 2007, rates have dropped about 25 percent.

No comments:

Post a Comment