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Tucson Industrial Realty, LLC Forecast for 3rd Quarter 2008

Every year the Southern Arizona chapter of the Certified Commercial Investment Member (CCIM) uses the Metropolitan Land Use Study, conducted quarterly by the Office of Economic Development at the University of Arizona, to determine vital market statistics. During the 3rd quarter 2007 the percentage of vacant leasable space was 11.9%.

What Will 3rd Quarter 2008 Tell us? We foresee a slight increase in the percentage of vacant leasable space for the 3rdquarter of 2008 at 13.8%. Barring a national recession that would ultimately affect Arizona, we see a slight slow-down in overall leasing activity in 2008. We think the most challenging product in the market will be the new construction which is considerably overall higher in both lease rates and asking sale prices. Lease rates for new construction product are averaging above $1/SF monthly and increasing to $1.50/SF and some of these do not include NNN expenses.

While prices for industrial buildings have continued to climb in value for 2007, we see this trend continuing for 2008. There may be some resistance above the $115/SF level and some new product coming to market in 2008 may be slow to lease or sell. Obviously, well thought out construction will play a critical part when competing with like and lower cost product. Tucson’s residential construction slow down overthe past 12 months will influence vacancies for smaller multi-tenant centers as the trade industries become slower and slower. We look to a continuation of this trend for 2008. In conclusion we see few challenges ahead in the industrial sales and leasing market in 2008. Tucson remains well positioned for continuing growth in retail and new in-migration will pump the market for new employment opportunities.

If you have any questions about our analysis for 2008 we would welcome the opportunity to hear from you.

INDUSTRIAL MARKET REPORT
3rd Quarter 2007

According to COSTAR’s 3rd quarter report for Tucson’s industrial real estate market, Tucson had net absorption of just under42,000 SF. Total vacant sublease space decreased ending the quarter at roughly 182,000 SF. Rental rates ended the 3rd quarter at $8.12/SF annual rent which was an increase from the previous quarter. There was 812,815 SF under construction at the end of the quarter. This was 446,143 of negative absorption within the second quarter of 2007 and positive absorption of 133,000 SF in the first quarter of 2007.

Vacancy: The industrial vacancy rate in the Tucson market area increased to 5.7% at the end of the 3rdquarter of 2007. The vacancy rate at the end of 2006 was 4.4% The largest leases signed in the quarter were Fed Ex Ground Corporation’s lease of 86,484 SF at 777 E. MacArthur Circle in the south sub-market, 78,000 SF by R.E. Barnett at 3000 E. Elvira in the south central market and the 70,000 SF lease signed by PODS at 6161 S. Palo Verde also within the south market of Tucson.

Inventory: Total industrial inventory in the Tucson market amounted to 32,935,433 SF in 2,079 buildings as of the end of the 3rd quarter 2007.

Sales: Total year to date industrial building sales activity in 2007 is down compared to the previous year. The market saw 11 industrial sales transactions with a total volume of $33,940,000. The average sale price this year is $66.46/SF. Cap rates have been lower in 2007 averaging 7.06% compared to the first six months of last year which averaged 7.97%. The largest transaction was for 100,800 SF and sold for $6,435,000 or 63.84/SF.

Home Sales Hit Low

According to the 2007 monthly sales report issued by the Tucson Association of Realtors Multiple Listing Service, sales for the year were down 18% from 2006 at 12,109 units. The average sale price for the year was $272,670 up from $270,214 in 2006. December proved to be the worst month for sales in 2007. The median price of all homes sold was $220,000.

Tucson Real Estate Market News

SMALL FIRMS NOT RENTING

A recent article in the Sacramento Bee is indicative of recent activity in the local Tucson commercial real estate market. Recent new owners of small buildings site escalating lease rates as one of the biggest reasons they buy. Rents at Tucson’s industrial properties increased, on average, about 5% - 10% over the past 12 months. Increases in rents have also been driven by record setting prices received from sales of smaller industrial and commercial properties. Property ownership lets small business owners build equity by betting on the local commercial real estate market. Most owner occupied buildings are 5,000 square feet or smaller, but many business owners have bought extra space to accommodate growth. Other benefits of ownership include the chance to buy a place closer to home and taking advantage of tax rules that allow owners to take deductions renters can’t. For a personal analysis of the advantages of ownership vs. leasing please call Dave Gallaher at Tucson Industrial Realty, (520) 294-1610.

AZ Job Growth To Slow?

Job growth in Arizona is expected to slow this year and even slower in 2008 according to new figures released by the Department of Economic Security who predicted the state will add 180,000 non-farm jobs during this year and next. This equates to 3.7% growth versus 5.4% in 2006, but is nearly three times the national rate.

According to the Eller College of Management’s Economic and Business Research Center, job growth in Tucson area will plunge sharply as a result of the downturn in construction and real estate markets. Lower consumer spending will also contribute to slower job growth in the local economy. The DES is also predicting non-existent job growth in the manufacturing sector with softeardemand for computer electronic products.

Green building is the practice of increasing the efficiency and reducing the environmental impacts of land development. This can be achieved not only through installation of energy efficient appliances or recycling white paper, but through more indirect energy saving techniques and innovative construction practices. Some of these are site selection, (which includes calculating transportation and Heat Island impacts on the environment), and water conservation, for example using non-potable wastewater for landscape irrigation. More ways to build green are to carefully choose construction materials by using rapidly renewable materials, parts and materials of the previously existing building, and by choosing materials that originate locally. Building green does not stop at the ribbon cutting. Operation and maintenance play a huge role in sustaining the energy efficiency and increased value green buildings provide.

Green building is a win-win situation. For example, if the HVAC unit for an existing building gets a green renovation; the utility bill will be reduced, lowering NOI. At the same time the now up-to-date energy efficientHVAC system has increased the property value. Building green will ultimately leave the owner with a more desirable, thus higher priced piece of real estate. An investor/owner will lower the monthly expenses during ownership and realize a higher return when it is time to sell.

Through better site selection, design, construction, operation and maintenance, one can reduce impacts on human health and the environment, not to mention increase the property value.

Returns on Energy Conservation
	Investment per SF	Rate of Energy Savings	Annual Savings per SF	Savings per 100,000 SF Office Building	Assest Value Increase at a 10% Capitalization Rate	Simple PayBack
Janitorial Services	$0.01	5%	$0.14	$13,500	$135,000	Immediate
Operations & Maintenance	$0.05	9%	$0.20	$19,800	$198,000	4 Months
Lighting	$1.04	16%	$0.36	$36,000	$360,000	3 Years
Heating, Ventilation & Cooling	$1.21	9%	$0.21	$20,700	$207,000	6 Years
All Combined	$2.30	40%	$0.90	$90,000	$900,000	2.5 Years

Sustainable and Responsible Property Investment in 2007, Dr. Gary Pivo, MRP, PhD, University of Arizona, UNEP FI Property Working Group Institute For Rsponsible Investment

According to local Tucson Planning administrator David Taylor, reached a population of one million residents sometime around November 12, 2006. According to Taylor, someone moves to Pima County every nine minutes while someone moves out every 15 minutes. One person is born every 41 minutes and someone dies every 67 minutes. Tucson reached half a million just 28 years ago. By 2040, planners say 10 million people will live in a "megapolitan" area sprawling from Prescott to Sierra Vista. More people move to Tucson from Maricopa County than anywhere else. Countywide, 47,000 homes have been built since 2000. Tucson has hit the one million mark about three years earlier than predicted.

Tucson and towns like Sahuarita, Vail, Benson, Canoa Ranch and Rio Rico are all experiencing substantial in-migration and job growth. These newly developed communities are building smart, sustainable mixed use developments that are attracting not only new residents, but the large retail organizations as well. Master planned communities offer diverse housing options, with commercial, retail and public areas all within a short walk of one another. Residents relying less on cars offer an alternative to the sprawling environmentally-adverse developments. Master planned infrastructure that accounts for everything from roads to utilities, allows residential and commercial usage to co-exist in these communities.

According to Tucson's National Retail Research Report, prepared by Marcus and Millichap Real Estate Investment Brokerage, the Tucson Market Index ranking rose to 18th place out of the 42 markets across the country. The report expects an increase of 18,000 residents and 11,000 jobs for Tucson in 2006. With retail sales expected to increase along with demand, vacancy rates are expected to drop to around 9 percent. After the average price per square foot increased by 3 percent from 2005, out of state retail property investors are being drawn into the hot Tucson retail market. These investors now account for 70 percent of all retail dollar volume. Currently, retail organizations are preparing to take full advantage of the growing market and attractive master planned mixed use communities.