32nd Annual CCIM Economic Forecast

The Region’s Real Estate Outlook

By Tom Leyde

The status of real estate in Southern Arizona this year will remain about the same as in 2023 until interest rates decline, members of the Southern Arizona CCIM were told at the annual organization’s annual real estate forecast.

A record number of Certified Commercial Investment Members attended the Feb. 29 event at Westin La Paloma Resort & Spa. Panelists discussed the industrial, multi-family, office and retail sectors of real estate. They also heard an overall outlook of the economy by guest speaker Lawrence Yun, chief economist with the National Association of Realtors. Yun told the members that the outlook mainly rests on what the Federal Reserve does with interest rates as it tries to rein in inflation.

Industrial
CBRE Industrial Specialist Jackson Kraft said the Flint Development project adjacent to I-10 in Marana will tell how industrial real estate absorption is going. The company has built two huge warehouses on 50 acres with 807,000 square feet of space.

Another 800,000 square feet of warehouse space has been constructed near Tucson International Airport and has been leased. The largest demand for space is 5,000 to 80,000 square-foot spaces, Kraft said, and tenants will be more diversified this year.

Vacancies overall, he said, are at about 4%.

Max Fisher, an industrial properties broker with BRD Realty, said individual building and land prices will pick up this year, but it will be competitive. A number of large companies are sitting on land waiting to decide how to use it, he said. Pricing for new space will see $120 per square foot but that may increase to $140 per square foot later in the year.

Multi-family
Michelle Goldberg, a property manager and investor with Park LLC and Allan Mendelsberg, principal with Cushman & Wakefield | PICOR looked at the multi-family sector.

Mendelsberg said multi-family properties are remaining on the market for 10 to 12 days and that rents have accelerated in the last four to five years. Goldberg, however, said rents are stabilizing while demand for units is huge.

“There are a lot of people that need housing right now,” Goldberg said. “Everything is supply and demand and there’s little supply now.”

In terms of supply, Mendelsberg said Tucson is in pretty good shape, but the area needs more units built as Tucson’s population increases. He said developers are looking for distressed properties to remodel.

He said only 15% of Tucson residents can afford high-end rents. “We’re paycheck to paycheck,” he said.

Insurance, Mendelsberg said, “has been a disaster,” with rates likely to increase 20% to 40% this year.

Office
Jon O’Shea, a designated broker with Vast Commercial Real Estate, said most of the office space in Tucson is 4,000 square feet and smaller. Office needs never died during the COVID-19 epidemic, noted Thomas J. Nieman, principal with Cushman & Wakefield | PICOR, but the sector became more complicated.

Small businesses are still using offices as a cultural hub even though many people can still work from home, O’Shea said.

“Being (working) alone isn’t that much fun,” added Nieman. “If (workers) are not in the office, how do you train someone? The office is necessary. It’s never going to go away.”

Medical office space is very healthy economically now, the panelists said. 

“People need doctors and doctors need real estate,” O’Shea said. Tucson has an aging population and medical businesses need to grow to keep up with the demands of older residents, he said.

Retail
Retail sales in Southern Arizona have been slightly higher and the leasing of space in the 4,000-square-foot range has been strong, said Dave Hammack, principal with Cushman & Wakefield | PICOR

What about Park Place Mall’s future?

Melissa Lal, CEO of Larsen Baker, said the death of malls has been glacially slow. She said the old Sears building could be turned into mixed use and self-storage. There may even be multi-family units built in the mall’s parking lot.

Hammack said there is unlimited demand for tea shops in Tucson. “I’m a tea fan and it’s a competitive market,” Lal added.

Any new concept retail stores coming to Tucson?

“Last year, it was ax throwing, this year it’s colonics,” Lal said. She said membership colonic shops are coming.

Also coming, Lal said, is a new restaurant, Cava. She described it as a Mediterranean Chipotle. Hammack said SCHEELS, a sporting goods chain, is also headed here from Phoenix.

Overall Outlook
Overall, Yun said, interest rates will drive the markets.

The office sector, he said, is still bleeding and high interest rates are hindering borrowing and refinancing.

Large banks were able to prepare for the Fed’s multiple rate hikes, Yun said, but smaller commercial banks were not. Most real estate loans are made by smaller commercial banks, he noted. When interest rates decline, he said, small commercial banks will be in better financial shape.

Yun blamed the Fed for not doing its job two years ago when it came to curbing inflation and then raised rates quickly.

On the multi-family scene, Yun said, there are massive apartment complexes going up in Phoenix and Texas and that apartment construction is at a 40-year high.

However, the federal deficit is hurting the economy and government spending exceeds tax revenue, he said. The cost of financing the national debt matches U.S. spending on defense, Yun said.

On the job front, Yun said, job creation is up and unemployment down.

His predictions for 2024:

• The Fed will cut interest rates, perhaps four times.

• Commercial property prices 

will stabilize, but not in the 

office sector.

• There will be moderate economic growth.

• Land and single home sales will do well.