Uncertain whether the market has bottomed out, buyers and tenants continue to be hesitant whether they should take advantage of attractive sale and lease opportunities.
That’s the word on the street as the 3Q Tucson office market report was released today by Picor Commercial Real Estate Services, a Cushman & Wakefield Alliance member.
For the most part, Tucson office market activity has remained fairly consistent throughout the year, with no exception in 3Q 2010. Consistency is a positive sign, however, it is still unclear whether this is a sign of more activity to come, or simply where the market is going to stay for some time.
Despite this consistency, landlords are still willing to offer attractive rental rates, concessions, and generous tenant improvement allowances. This practice will likely continue until the air of uncertainty clears. Savvy general office and medial tenants are taking advantage by locking in very attractive rental rates.
Purchase activity is still virtually nil because of the difficulty to secure commercial financing. The occasional investment sale is due to the seller’s agreement to provide short-term financing thereby enabling the buyer to weather the drought in the conventional credit market.
Valuation methods show a large difference between pricing of office and medical properties from an owner/user perspective and those evaluated from an investor perspective. Per square foot purchase prices for users still remain fairly high, while numbers for investment sales are much lower due to a market wide drop in rental rates and an increase in cap rates. These two valuation methods will likely equalize in the future, with the likely result being the reduction in per-square-foot user pricing.
Economic slowing persists in the Tucson industrial sector. Tenants and buyers recognize the opportunity to apply leverage in this environment, resulting in continued pressure on lease rates and sales prices. While market-wide vacancy dipped from 11.4% to 10.9% in 3Q, positive absorption is expected to be reversed before the end of 2010.
Sales activity increased in 3Q, equaling the first two quarters combined, with nearly all owner/user purchases using SBA and seller financing due to scarce availability of institutional capital at favorable terms.