The Changing Trends Shaping Southern Arizona’s Industrial Real Estate Market

Southern Arizona is a hotbed of growth and activity, especially in the commercial real estate space, and particularly when it comes to the industrial segment. 

The previous two years have marked the best years on record for the industrial market, and the segment continues to fuel one of the biggest construction pipelines in the U.S. By the end of 2021, there were more than 33 million square feet of industrial space under construction and construction deliveries are projected to hit an all-time high in 2022, according to Co-Star. The increase in speculative construction demonstrates the strong level of confidence among developers and lenders, a “build it and they will come” philosophy, that developing a spec building will lead to tenants.

Examining Trends

As the old real estate mantra goes – location, location, location. Southern Arizona has long been a sweet spot. It has a marked lower cost of business than neighboring states such as California; limited probability of natural disasters; centralized proximity to California and Mexico making deliveries easier; and easy access to transit networks, such as I-10, I-19, I-40, I-17, Union Pacific and BNSF railroads to support firms that serve many west coast markets.

Specifically, the south submarket in Tucson, near the Tucson International Airport, is becoming the core of the city’s growing industrial market. Exceptionally positioned close to existing infrastructure, including I-10 and I-19, along with Union Pacific, has made it an ideal location for the distribution and logistics industry. 

Perhaps the two most notable trends that have emerged in the last two years include employment and spending habits. Specifically, with many more people working remotely and e-commerce becoming significantly more commonplace – a new demand for logistics space was created in Southern Arizona. Many companies, from local shops to big box retailers, have had to adapt to having more stock on hand and providing quicker deliveries. In many cases, competition among companies has distinctly increased consumer’s expectations. 

How Are These Trends Shaping Southern Arizona’s Economy?

Despite disruptions to the supply chain, online ordering and the need for quick delivery and logistics space increases have made Tucson and its surrounding area a boom-town in the industrial sector. 

Availability

There are currently approximately 320,000 square feet of industrial construction projects underway in Tucson, according to research from Co-Star, which has the most comprehensive database of real estate data in the U.S. Among the recently completed projects, Tucson has welcomed a 76,230-square-foot project near the airport and a 270,000-square-foot Amazon building, which complements its 857,000-square-foot distribution center at the Port of Tucson. 

On the whole, over the previous 12 months, Tucson has absorbed 1.6 million square feet of industrial space, which accounts for a growth rate of more than 132%. Industrial and warehouse vacancies have decreased to 3.5% from the previous 12 months.

As builders and developers look to a financial partner should they need to purchase and close on the land prior to construction, financial institutions with deep roots in Southern Arizona such as Alliance Bank can help. From credit and ground-up construction lending to acquisition lending and more, Alliance Bank’s full spectrum of products and knowledgeable bankers can help provide direction on the best options available to move forward. 

Affordability 

A major demand driver, affordability, is always one of the most important considerations for a company. Co-Star cites that asking rents average $9.70 per square foot, which is below not only the National Index, but also significantly below rents in California markets. In the Port of Long Beach, which is a one-day drive from Tucson, rents are upwards of $15 per square foot. With those figures in mind, rents have grown in Southern Arizona, increasing 6.1% in the past 12 months. Due to limited space availability and demand, rent growth is expected to maintain at a steady pace this year.  

Experts anticipate that the logistics segment, which is leading all other sectors in rent growth, is projected to continue to outperform specialized industrial spaces in terms of rent growth as consumers continue to rely on home delivery. 

Employment

Arizona’s unemployment rate sits at 3.7%, which is the lowest rate for the state since just before the Great Recession. Its labor force also expanded, increasing by 57,200 workers since February 2020, a 1.7% increase. That said, payrolls in Arizona’s Transportation, Warehousing and Utilities sector increased by 21.7%.

Putting Your Best Foot Forward in Today’s Market

As the economic climate continues to evolve in Arizona, in surrounding states and across the nation, many businesses are determining whether the time is right to invest, pull back or stay the course. For builders and developers, that includes three key tenets:

• Knowing your market;
• Being well informed (e.g., leasing to a strong tenant, offering a reasonable length of lease term, determining pricing, etc.); and
• Knowing your lender and their lending parameters.

In times like these, determining the right next step includes assembling a trusted team that understands a business’ short- and long-term goals, has a firm grasp of the current landscape and is equipped with tools and resources to help a business build for a successful future. 

Looking Forward

Looking toward the second half of the year, insights from a wide range of economists specializing in commercial real estate point toward the current trend continuing as net absorption, construction and lease rates increase. And as growing numbers of companies take an interest in Southern Arizona’s unique position, we can ensure that Tucson is ready to respond. For an in-depth view of the June trend report, please click here.

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Sandra Barton is Senior Director, Commercial Real Estate, for Alliance Bank of Arizona, where she funds commercial construction, acquisition and development, term and RLC loans. Based in Tucson, she serves clients throughout southern Arizona.