Southern Arizona’s industrial and manufacturing sectors are facing headwinds from multiple economic pressures. Rising construction costs, elevated interest rates, and proposed tariffs on imported steel and aluminum are reshaping development dynamics in the region. As the cost of building continues to climb and the threat of a 50% tariff on steel looms, developers, manufacturers, and tenants alike are recalibrating their strategies. This article explores how these challenges are impacting new development, leasing decisions, reshoring trends, and the growing demand for turn-key facilities in Southern Arizona.

Rising Construction Costs and Elevated Interest Rates

The dual burden of increased material prices and high interest rates has put significant pressure on the economics of new construction. Southern Arizona—long valued for its affordability and availability of industrial land.

The rising cost of capital has discouraged speculative industrial projects, particularly those involving large-scale manufacturing, warehouse, and logistics facilities. Developers are encountering increased difficulty in securing financing and leasing, which not only slows new construction but also limits speculative development that typically drives industrial growth.

The ripple effect is broad: reduced construction activity means fewer opportunities for local contractors, subcontractors, and suppliers—key economic drivers in the Tucson region.

Proposed Steel Tariffs and Their Impact

The proposed 50% tariff on imported steel—a material that accounted for $32 billion in U.S. imports in 2024—poses a particularly acute challenge for industrial construction. The United States continues to consume more steel than it produces, and Southern Arizona, with limited local supply and close ties to cross-border construction networks, is especially vulnerable.

Steel is a foundational material for tilt-up concrete buildings, structural framing, utility infrastructure, and manufacturing equipment. A significant price hike caused by tariffs could make already expensive projects economically unfeasible.

More broadly, these tariffs may undermine efforts to reshore manufacturing from Asia to the United States. Instead of shifting production from China to Southern Arizona, companies may opt to locate in lower-cost countries with favorable trade terms such as Vietnam, India, or Mexico—where finished goods can still be exported to the U.S. at competitive rates.

Uncertainty and Its Effect on Leasing Activity

While the proposed tariffs have not yet taken full effect, the uncertainty surrounding trade policy has already chilled activity in the industrial leasing market. Many companies are delaying decisions as they attempt to assess the potential impact on construction timelines, supply chains, and capital budgeting.

This caution is reflected in slower lease-up of newly delivered industrial space. Buildings that might otherwise be absorbed quickly are sitting longer on the market, as tenants hold off on commitments due to unpredictable cost structures. This trend affects property owners and developers, resulting in underutilized space, delayed revenue, and slower job growth.

Increased Demand for Turn-Key Manufacturing Facilities

In response to these delays and rising costs, many manufacturers are seeking turn-key facilities that allow them to start operations with minimal lead time. These buildings—already equipped with essential infrastructure such as electrical systems, HVAC, loading docks, and production-ready layouts—can significantly shorten time to market.

Southern Arizona is experiencing increased interest in such spaces, especially near major transportation arteries like Interstate 10 and the Port of Tucson. Turn-key facilities offer companies a way to avoid the uncertainties of ground-up development while still benefiting from the region’s strategic location and workforce advantages.

Local developers and economic development agencies are now emphasizing the availability of these ready-to-go properties to attract manufacturers that prioritize speed and flexibility.

Proximity to Mexico: Opportunity and Risk

Southern Arizona’s location on the U.S.-Mexico border positions it as a key player in North American manufacturing and logistics. However, this proximity cuts both ways. While companies may benefit from binational supply chains and cross-border trade, the region also faces competition from Mexican cities like Nogales, Sonora, which may absorb industrial investment from companies seeking to sidestep U.S. tariffs .

Nevertheless, Tucson and Pima County still offer compelling advantages: strong transportation infrastructure, access to a bilingual workforce, and a more stable business and regulatory environment. If promoted effectively, these strengths can help Southern Arizona remain competitive—even as manufacturers explore alternate sites.

Conclusion

The combination of high construction costs, interest rates, and potential steel tariffs presents a formidable challenge for Southern Arizona’s industrial market. These factors have curtailed new project starts, slowed leasing activity, and increased the appeal of manufacturing locations outside the United States.

Yet, amid these challenges, opportunity remains. The growing demand for turn-key industrial space positions Southern Arizona to attract companies that need to move quickly. With its proximity to the West Coast, Mexico, and key transportation routes, the region remains an attractive hub for logistics, warehousing, and advanced manufacturing.

To navigate these complexities and identify immediate opportunities, reach out to the Commercial Real Estate Group of Tucson. We specialize in helping companies find turn-key industrial facilities, mitigate construction delays, and capitalize on Southern Arizona’s strategic location. Whether you’re expanding, reshoring, or launching a new operation, we can help you bring your product to market—faster and more efficiently.