2010 Tucson Commercial Real Estate Forecast 1/14/2010
Submitted by Carol_Shepard on Mon, 01/18/2010 - 9:39am
Excerpts from Tucson Realty & Co.’s press conference covering major market sectors INVESTMENT OVERVIEW Sales volume increased significantly in the second half of the year and while… we may have hit bottom as far as the volume of sales… we probably haven’t hit the bottom on prices. Because loan defaults continue to increase, we can expect the resale of bank-owned properties to continue in 2010. Although this obviously brings misfortune to distressed owners, it brings opportunities for investors. The second important factor is increasing investor returns (cap rates) associated with lower purchase prices. Cap rates have increased steadily across all property types from around 7.5 to 8 percent in 2008 to 9 percent and above in 2009. Prices are starting to reflect the deteriorating performance of properties resulting from increasing vacancies and declining rents. Prices of individual properties are likely to continue to decline through 2010 even as sales volumes increase. A related factor creating downward pressure on commercial real estate prices is the sales of notes backed by commercial property. Investors have been focused on purchasing these notes at deeply discounted prices…. This market is competing for capital that might have otherwise been invested directly into properties and has resulted in investor expectations of large price discounts. What should we expect going forward? Look for cap rates to push past the 10 and 11 percent range. The inability to refinance would result in ongoing inventory of bank owned properties that investors will continue to focus on. Liquidity may improve in 2010 as there are signs at the national level that the Commercial Mortgage Backed Securities market is re-opening and several REIT’s have successfully raised equity capital. This could shorten the correction cycle that some expect to extend through 2012 if more money begins to flow into refinancing. In 2011 and 2012, economic growth will likely stabilize deteriorating property performance and more liquidity will likely flow into the industry. (This) may mean that 2010 is a year to make good deals if you’re an investor. It may also be a good time for businesses that have weathered the storm to buy the buildings they are renting or move to a building they buy. 2010 will be the year to make deals. OFFICE MARKET OVERVIEW The office market is much stronger than the industrial, retail and land markets. Tucson has hit bottom and is slowly moving in the positive direction, as far as office leasing is concerned. The improvement will be gradual and 2010 will see some movement of tenants… the relocations need to make economic sense. If you don’t need (larger) space and you are moving to take advantage of lower rates, it makes sense to try to get that from your present landlord along with some minimal improvements, unless (by moving) you are able to save $3 -$4 PSF, per year. In today’s market there are a few existing well-located Class “A” buildings out there which are offering the total package at $20 versus $24 - $25 PSF “Full Service”, and a few existing well-located Class “B” buildings which are offering the total package at $18-$19 versus $21-$22 PSF “Full Service”. Office vacancy is approximately 16 percent and will continue to recede. We will also continue to see lenders going back to owners whose property values have decreased to where the loan-to-value ratio is a lot higher than it was when they bought. Don’t be surprised if you get a call from your lender explaining they are sending out an appraiser to evaluate your property. INDUSTRIAL OVERVIEW Not since 9/11 have prices fallen as fast and far. Vacancy rates at the end of the fourth quarter have exceeded 11 percent in Tucson, but are leveling off. Sales prices in 2008 were in the $112 PSF range and presently prices have dropped to $59 PSF. Now is the time to snap up some great bargains. There is no industrial space under construction at the end of 2009. The industrial market shows an ongoing weakness with vacancies up, absorption negative and construction at a standstill. This trend should continue well into 2010 until more signs of a sustainable recovery are evident. RETAIL Shopping center vacancy rates are 12.1 percent, with some submarkets as low as 7.8 percent. Lease rates fluctuate from as low as $11 PSF per year NNN to $25 PSF per year NNN with the majority falling in the $14-$18 PSF range and newer construction in the mid to low $20 PSF range. Lease rates are likely as low as we shall see in this cycle. It seems we have hit most of the lows and 2010 will trend up slowly. Given the psyche of today’s consumers and their current spending habits, we may not see the level of occupied retail space that we experienced in 2007 for quite a few years. Distressed properties will be more in the forefront of the marketplace. Commercial notes will need to find new funding. Life insurance companies will absorb some of the funding along with regional banks and credit unions. Shopping center vacancy rates in Tucson metro for 2010 will be 9.5 percent overall. LAND OVERVIEW Pima County had a scant 15 commercial land transactions in 2009. This is a 52 percent drop from 2008 and a 65 percent decline from 2007. The biggest sale was a parcel located downtown that sold for $40 PSF, or $6,500,000. This is the new site for Unisource Energy Corporation. There are currently 335 commercial parcels on the market. I think the land market in 2010 will remain in an unsettled state, although we may be bumping along the bottom.
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foreign currency exchange
Good overview. Gave me a few