Turning Around the Upside Down

By Kimberly McGhee & Allie Bell

In a marketplace where things are constantly changing, the only thing that’s safe to say is that Tucson is in its correction phase.

One of the bright spots of the current economy is Tucson’s investment market. Hank Amos, president and CEO of Tucson Realty & Trust Co., believes there are incredible deals to be had this year. “Stressed properties offer excellent buying opportunities,” he says.

“Last year, some markets were staying relatively strong, but now everything is slow and all sectors are feeling it,” Amos adds. “However, because of Tucson’s size and slower growth rate, Tucson still has a leg up.”

Michael Gross, office leasing and investment specialist with Tucson Realty & Trust Co., says, “Maybe (Tucson is) blessed because we didn’t and don’t have some of the large industry companies that are being hard hit by cutbacks in employment.”

Gross mentions several benefits of the area, including the fact that the city is service-industry driven with stable ground, has good weather for most of the year, and is centrally located in the Southwest with a diverse population of both employment and people. The Old Pueblo boasts a good retirement and visitor population, and has good foreign trade with Mexico. Gross adds that the city also has good medical resources and a strong medical industry, with increasing optics research. These resources are backed with a very strong secondary education system centered on two leading institutions in the University of Arizona and Pima Community College.

“I have no doubt that 2009 will be a year of turmoil for the county,” Gross says, “but I feel that Tucson will be a better overall environment than the rest of the country.”

OFFICE MARKET
Although we continue to hear uneasy news about the national environment, Gross says that Tucson seems to be somewhat better insulated from the rest of the nation, “because we are a service-oriented tertiary city.”

However, like many other cities, Tucson is experiencing slowing construction, increased concessions for tenants and increased cap rates. “I’m not sure what exactly is going to happen in the office market," he says, "but it will definitely lean on the soft side.”

Gross mentions that cap rates will continue to rise to the point that “we will start seeing cap rates increasing to about 9% to get a building sold.”

RETAIL MARKET
Although retail development is slowing, according to the data from the Metropolitan Tucson Land Use Study (MTLUS) 4Q08 report, 25,000 SF were added to the market in 2008. There were several large developments that came online over the past year, including the first phase of Barclay’s Tucson Spectrum and Vestar’s Oro Valley Marketplace.

“Due to the state of the economy,” says Rita Perez, retail specialist for Tucson Realty & Trust Co., “tenants now have more leverage in the negotiation process and will continue to ask for concessions — whether it be more free rent, bigger TIs or rent abatement.”

Paul Schloss, principal for the Retail Services Group at Bourn Partners, says, “Currently, in this credit financial freeze, retailers are focused on conserving cash to fund operations and cash flow.”

He explains that in ordinary times, publicly held retailers allocate an established percentage of annual sales/profits back into growth, thereby increasing stock values. Each January, the capital expenditure for the current year is ratified using the sales, profits, operating costs and earning metrics of the previous year for the next. “The need is to expend capital into growth and/or productivity, based on existing sales trends that will be accretive to earnings,” Schloss says. “That paradigm, by most measures of the crisis, is in suspension.”

INDUSTRIAL MARKET
Although new development is not being started, industrial projects are still being built. If a property was in the planning stage prior to the downturn, it may still be under construction today. However, those buildings will likely have a difficult time finding tenants and will possibly sit vacant for some time.

According to Chuck Blacher, industrial specialist with Tucson Realty & Trust Co., “Industrial vacancy rates in Tucson have climbed to 11% during 4Q08, and this number is expected to increase in 2009. During the 4Q, there were only three sales of industrial-zoned properties 15,000 SF or greater.”

LAND MARKET
In the Tucson land market, finished lot prices were as low as $17,500/lot, while some platted lots changed hands for less than $5,000/site, according to Tucson Realty & Trust Co. reports.

“Raw land sales were all over the map,” says Mick Cluck, land specialist with the brokerage firm. “Buyers were presented with a golden opportunity to acquire land at true fire sale prices, however, I think 2009 will bring even better deals.”

Will White, who heads the Tucson office of Land Advisors Organization, believes the land market will be the future of Pima County. “For all that are associated with land development and land planning in Pima County,” he says, “now is the time to think big! The slowdown in the market is giving everyone a chance to catch their breath and take time in planning their projects. All of the deals and all of the planning that takes place over the next three to five years will shape the future of this region.”

FINANCIAL MARKET
“Loans are about to adjust and market values are in effect,” Amos says. “Banks are asking for more money down to get debt-to-loan ratio back in line, and (developers) don’t have it. Many of these developers had multiple loans with one bank and they are finding that if you default on one loan, the bank considers that a default on all your loans/properties.”

Alan Smith, executive vice president and development principal with Bourn Partners, concurs, “There may be opportunities out there, but the lender requirements are so stringent (sometimes asking for 50% down and signing for the loan personally), that it is nearly impossible to get a deal done.”

On the other side of the coin, Perez says, “Delinquency notes for commercial mortgages were surprisingly lower than one would think; although that is expected to rise in 2009, as landlords will find it difficult to re-finance existing notes coming due.”

STIMULUS PACKAGE
On March 12, 2009, leaders from across the country came together in Washington with one mission — to implement the Recovery Act (otherwise knows as the stimulus package). Now the question is, “Will the money actually help the Tucson market?”

“Not quite sure yet,” Smith says. “It depends on how it is allocated.”

Schloss has similar concerns. “As I understand, there is little that qualified for coming to Southern Arizona in the first wave — other than road repaving, drainage, etc. Hopefully the second wave will fund projects otherwise stalled.”

SILVER LINING
This market is favorable for tenants because they now have the upper hand. Amos believes they have the advantage because, “they can structure better deals than before and ask for more TIs. Leases can now be renegotiated at lower rates before they are actually up, and tenants can lock in these rates for years to come.”

Schloss believes the Tucson market will recover quickly because the business of Arizona is growth.“Growth is unavoidable,” he explains. “With the extraordinary cost of living in places like San Diego and Orange County, Tucson’s reasonably priced housing, affordable lifestyle and well-respected university system will prove to be our greatest assets of all.”

www.bournpartners.com
www.cbre.com
www.landadvisors.com
www.tucsonrealty.com

Login to comment on an article. If you're not registered, register here.