The Tucson office market benefits from underlying solid demand factors, as low costs and a favorable demographic environment encourage company growth and relocation. The industry’s focal points were Raytheon’s Missile & Defense HQ and the Davis-Monthan Air Force Base.
Demand has also come from the public, insurance, and healthcare sectors. Moreover, the University of Arizona, an R1 research university, frequently works with firms through public-private partnerships and provides the market with a consistent flow of talent.
The pandemic’s initial downturn in property performance has now steadied, and things now appear to be in a rut. Although the yearly rent increase is respectable at 1.1%, the metro-wide vacancy rate is unchanged at 10.5%. With only roughly 200,000 SF currently under construction, or 0.7% of the available inventory, a more serious supply-demand imbalance has been avoided thanks to the low building pipeline. Moving forward, the sector will profit from this absence of supply-side pressure.
The average market cap rate is 9.0%, significantly higher than the 7.0% average for the US. In addition, typical prices are available for over 50% less than the National Index. A total of $224 million worth of office properties have changed hands in the last year due to investors being attracted to the market by the lower price point and higher yields. Investment activity may be limited in the upcoming months due to the ongoing rise in interest rates and the uncertain Economic Outlook.
Tucson’s vacancy rate has stabilized at 10.5%. After summer 2021’s peak, rates remain favorable over their 7.5% pre-COVID low. Most office users’ vulnerability can be ascribed to their considering their space requirements in light of the revolution in hybrid work. Some businesses decided to cut back their space needs, contributing to the 320,000 SF on the market for sublease. Moreover, the potential for some companies to make leasing decisions until more information is available on the 2023 recession and if employees will be coming back to the office.
The Tucson office market is therefore striving to gain speed while absorbing swings from the quarter. Businesses involved in healthcare have been particularly active. These represent some of the biggest signings in history.
Geographical restrictions continue to exist Downtown. Tucson’s continuous efforts to transform the city center into A convenient urban location promote office. The function of the office is evolving and is being utilized more frequently as a labor retention and attraction agent. Workers appreciate businesses that can provide a stimulating workplace, and closeness to restaurants and other amenities is becoming increasingly important. As a result, the most prestigious offices in desirable locations keep doing well.
The cost of office space is still significant for businesses developing in Tucson. Tenants can save about 20% on top-line real estate at $23.00/SF compared to adjacent Phoenix, where the average rent is around $28.50/SF. Discounts are considerably more significant and can lead to savings of more than 50% when compared to major Californian areas, which have some of the most expensive rentals in the nation.
The Tucson office market could withstand the recent disruption of the office sector better than many other metros because there was little supply-side pressure for most of the last decade. Year-over-year rent growth remained positive even during the COVID pandemic, and rental rates have been slowly rising since 2020. The current annual rent growth rate is 1.1%, with gains at better properties slightly outperforming at 2.2%. In North Tucson/Oro Valley and the Foothills, where most of the metro’s high-end office product is concentrated, rent growth is leading the way.
Most of Tucson’s wealth is concentrated in these affluent suburban communities, which also have higher educational levels than Tucson’s other neighborhoods.
A little premium over conventional space is charged for the medical office properties, which comprise around 25% of the metro’s office portfolio. Although many people postponed routine operations and elective surgeries at the pandemic’s beginning, vacancies quickly declined over the following 12 months and are again at their pre-COVID level. Over the previous five years, average market rents in this sector have increased by more than 15%.
It’s difficult to predict precisely what will happen to companies’ office space needs in the post-pandemic world, as it will depend on various factors such as the industry, company size, and the preferences of individual employees. However, some potential scenarios could play out:
Hybrid models: Many companies may adopt a hybrid model that allows employees to work from home sometimes and come into the office on other days. This could result in a shift towards smaller office spaces and more flexible working arrangements.
Emphasis on collaboration: For companies that place a high value on collaboration and face-to-face interaction, there may still be a need for traditional office spaces. However, the emphasis may shift towards creating collaborative spaces and fewer individual workstations.
Reduced demand: Some companies may find they can function perfectly well with a fully remote workforce and may choose to downsize or eliminate their office space. This could lead to reduced demand for commercial real estate in some areas.
The greatest hybrid arrangements promise to bring together the qualities that everyone wants: the flexibility and comfort of working from home with the creativity of in-person cooperation. To achieve that balance. Companies need to anticipate the staff that will be on-site between one to four days per week for all roles that are not needed to be performed there.
Looking ahead, companies need to plan how to implement the hybrid model and look at the use of employees in each role and function inside their organizations. Matching the staff with the correct priorities could encourage productivity gains as firms redesign their hybrid future.
Some employees may consider changing jobs if their company returns to exclusively on-site employment. The regulations businesses finally adopt, the availability of jobs at the same compensation rates, and the role that automation plays in altering the tasks that humans do may all influence whether employees who think they might leave ultimately decide to stay.
The extent and nature of changes in companies’ office space needs will depend on how employees decide to work in the post-pandemic world. If many employees continue to work from home, companies may require less office space or a different type of office space that accommodates a more flexible and collaborative working environment. On the other hand, if employees return to the office in full force, companies may need to maintain or increase their office space to accommodate all their employees. Ultimately, the decision will depend on each company’s specific needs and preferences and its workforce.