Commercial real estate market expected to cool - The Explorer: Import

Commercial real estate market expected to cool

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Posted: Sunday, August 6, 2006 11:00 pm | Updated: 7:52 am, Thu Mar 24, 2011.

August 2, 2006 - The recent cooling of Tucson's housing market is leading to a similar slowdown in commercial real estate, some experts say.

However, many see that slowdown as less pronounced and shorter in the fast-growing Northwest.

Real estate experts who spoke last week at a midyear presentation by Tucson Realty and Trust Co. described the commercial market in the county as having reached a "plateau." In later phone interviews, they described the prospects in the Northwest to be somewhat more encouraging.

"When the market starts to recover," analyst Tim Bentley said, "[the Northwest is] going to be ahead of the curve."

According to the analysts, the cooling of Tucson's commercial real estate market is caused by, among other things, the high price of land, high construction costs, and the slowdown of the residential market.

Bentley predicted that even the retail market, which is currently strong, especially in the Northwest, would slow down as "retail follows rooftops."

In some parts of the Northwest the cost to rent retail space has hit more than $25 per square foot.

However, Bentley and others don't expect that slowdown to occur in the Northwest until after the retail market catches up with recent growth.

"Most of the residential construction in the town was in that area," said Tucson Realty and Trust's Michael A. Gross. "We've had such a big growth of houses and we haven't caught up."

Gross added that much of the office space being built and rented in the Northwest is filled by medical professionals needed to serve the growing population. He said that after residential development slows down, so will the need for more doctors.

"A doctor isn't going to move into an area unless there are people there," he said

According to Bentley, large national and regional businesses also are willing to pay a lot for land in the area because they predict it will grow. This is also helping to elevate commercial real estate values in the Northwest.

"They've done their homework and they know that the Northwest is growing rapidly," he said.

Marana Town Manager Michael A. Reuwsaat agreed that businesses are moving into the Northwest because they expect future growth. He said that businesses are willing to pay high rents on new developments now because they expect that in three years, when their new storefronts are built, there will be many more people in the area.

According to the predictions made by Tucson Realty and Trust's presenters, the growing population will help real estate values throughout the Tucson area which, according to census estimates, will for the first time house more than 1 million people in 2007, making it an attractive market for large retailers.

Developer Greg Wexler agreed that retail land in the Northwest is a hot commodity, even if it is getting a bit expensive.

"I don't believe that the cost of commercial land is stopping development," he said. "If I had more land, I could sell it."

Tucson Realty and Trust's Richard Foerster said the price for industrial land has risen to previously unheard of values. Land in the Northwest, along I-10 can sell for $7 to $8 per square foot. Patrick Welchert, the company's industrial specialist, said there is a strong demand for even more space, even with the high price of land and the even higher cost of construction, about $100 per square foot.

Marshall Vest, an economist at the University of Arizona, also believes that there is a shortage of available industrial space. He said the shortage is pushing rents up. He hopes the higher rents will encourage builders and investors to provide more space.

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