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FORECAST FOR THIRD QUATER 2005
Following the theme of last year's Titanic story, it is full steam ahead for industrial growth moving forward into 2005. The iceberg size buildings available we talked about last year are disappearing, but are they being occupied? A recap of our discussion last year includes the following facilities.
Firstly, Bombardier's 235,000 SF. Late last year, The Tucson Airport Authority ratified the sublease of approximately 32.5 acres of the Bombardier property to DunnAir, a full service completion center for large corporate jets. Employment is expected to begin at 150 employees and eventually grow to 600 within five years. The property includes 235,000 SF built in 1990. Total occupancy is planned for May 1, 2005.
Weiser Lock's facilities of 260,000 SF ( on last year's list) were purchased by the Silagi Family Trust for $5,200,000. The Silagi Familty Trust has been actively acquiring Arizona properties over the last couple of years. The facility has been demised into 20,000 SF units and larger. Activity has been strong here the past year and several deals are pending according to my friends at PICOR. Aggressive pricing based on a low acquisition cost make this a competitive project. The building complex has been renamed Aero Business Park.
The University of Arizona Research and Technology Park (on last year's list w/150,000 SF) has experienced a great year with the leasing of 125,000 SF to Citi Card during 2004. Citigroup announced plans to locate one of Tucson's largest call center operations last year. Citi Cards took occupancy of the vacant call center of Convergy's totaling 116,000 SF. Raytheon continued their Tucson expansion at the park during 2004 as well as several smaller high tech companies in the recently completed "wet lab" facility.
The Casework's facility of 93,000 SF (also on last year's list) was purchased by the Offshore International Group which provides warehouse and employment services for companies with maquiladora operations. This acquisition is directly related to Tucson's proximity to Mexico and a almost 40 year relationship of US/Mexico economic development efforts.
Airview Business Park (also on last year's list) at 153,000 SF was acquired in 2004. This building is being modified and improved to house distribution and warehouse space.
Tucson Airport Authority's west ramp warehouse facilities (also on last year's list @ 150,000 SF available) experienced leasing of 125,000 SF during the past year and first part of 2005.
Century Park construction was slowed somewhat in 2004. Last year we showed 240,000 under construction with 150,000 SF vacant. There was approximately 100,000 SF of leasing in 2004 with 190,000 SF available. The intermodal facilities of Puerto Nuevo are increasing freight traffic on a fairly consistent basis.
Depending on the official outlook or perspective, the market experienced strong activity and lease up of these facilities that were highlighted in my presentation of last year. They represent the largest of industrial transactions of all of last year.
WHAT'S UP IN 2005????
The industrial market will be the year of the new user building market. It seems that there are a lot of players out there scrambling to be the first ones out of the block to plug the gaps in supply for owner-users.
Rio West has 10 acres in escrow at I-10/Ajo/Benson Highway and will be constructing buildings in the 8,000-20,000 SF for lease or sale. Construction is expected to begin later this year.
Chris Kemmerly companies has several key industrial land deals that most recently include the balance of remaining land that once was part of the Freeway Airport at Prince and Highway Drive. Several buildings will be available to owner-users and also for lease. Kemmerly company's also has plans for several buildings at their Valencia site near Tucson Blvd but that may be on hold due to development issues with the Airport.
Mike Naipheh recently closed on 15 acres at I-10 and Palo Verde for $1.4 million or $2.14/SF. Mike will be developing multiple buildings to own or rent.
Tinajas Development will be constructing nine buildings for the owner-user market on ½ acre lots at Volunteer Industrial Park near the intersection of Contractor's Way and Irvington. For more information about these properties, call 520-294-1610. Those buildings will be targeted for smaller users in the 4,000-8,000 SF range with a wide variety of amenities.
In a nutshell, there will be continued strong demand ahead for industrial space throughout 2005. The owner-user market will continue to dominate much of the activity and prices will climb. Both landlords and tenants will continue the dance for more aggressive lease rates depending on which side of the aisle they are on respectively. Lease rates may edge up very slightly in a looser rental market.
Personally, I don't see significant increases in lease rates during the coming year. I do however, see a significant increase in building prices and construction costs which is consistent with the last several years. For smaller buildings of new construction, we should see some pretty high prices before year end as these buildings begin to come on line.
We will also see land prices increasing as well. Most of the new lot development of fully serviced lots are selling in the $3.75-$5.00 price range. The project at Orange Grove and I-10 continues to sell lots at plus $7.00/SF.
There is concern about another restructuring and continued debate about our community's economic development efforts with the creation of another "mega" economic development conglomerate. I worked for Tucson Economic Development Corporation in 1978-1980 during some of the other boom times of growth and economic development. It seems as though not much has changed in 25 years with trying to change our ED efforts as a community again. We have lost a real professional in Steve Weathers and we wish him well. Fortunately, we congratulate him in his new position as Executive Director of the Tucson Association of Realtors. I hope we can figure out our new plan and wrestle with the political maneuvering although thankfully, we seem to grow and multiply despite the many reincarnations of our ED efforts.
Summary of Outlook for 2005
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Leasing remains strong in 2005
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Lease rate increases will be small
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Larger buildings will see some interest from users and investors
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Owner/ user market brings high prices
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Investment market will stay active in 1005 as new players enter the market
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Lower cap rates will continue
In summary, it has been a great year. I see a very positive market this coming year. I predict net absorption and I predict the overall vacancy rate for industrial space per the Metropolitan Land Use Study to be 19.1% for the third quarter of 2005.
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