Greater Tucson commercial real estate not yet at bottom - Tucson Local Media: Pima Pinal

Greater Tucson commercial real estate not yet at bottom

Local experts say people should prepare for more trouble

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Posted: Tuesday, July 21, 2009 11:00 pm | Updated: 1:26 pm, Mon Apr 18, 2011.

With the commercial real estate market in decline, many people wonder if it's  hit rock bottom.

Not by a long shot, according to the folks at Tucson Realty and Trust.

"Across the country, there's going to be a tsunami of commercial mortgages that will default," said Hank Amos, president of Tucson Realty and Trust.

Tucson Realty and Trust offered its mid-year report last week, when company representatives gave their predictions for the local commercial real estate market.

According to prognostications, a wave of foreclosures similar to that left people in the home market drowning in a sea of debt and creditors scrambling for the lifeboats is pressing down on the commercial market.

As commercial property values fall and businesses struggle to make ends meet, companies that rent properties will fight to pay the rent and owners to make their mortgage payments. Amos said that's a recipe for disaster once banks begin to call in the notes on the properties.

Added to that, banks have been stingy with financing.

"The problem is how do you refinance projects in this environment with credit so tight?" said University of Arizona economist Marshall Vest.

Vest said many struggling commercial projects had their financing tied to 3- or 5-year payback cycles. With those loans bearing down, Vest said many commercial property owners would start looking to refinance. Without much luck, he thinks.

"It fits into the business cycle, commercial markets lag behind the residential," Vest said.

As that happens, experts at Tucson Realty and Trust predict an increase in vacancies. According to the firm's Rita Perez, by the end of the year Tucson could see vacancy rates might jump to 12.5 percent.

Chuck Blacher of Tucson Realty and Trust said more than 2 million square feet of industrial space has been built in the past few years, but as much as 21 percent of that sits vacant.

"This is in direct response to the current economy and lack of consumer demand," Perez said.

Perez and other experts do see some bright spots in the forecast.

Right now, Perez said, businesses looking to rent new or renegotiate for their existing locations will have more bargaining power than ever.

"Due to the state of the economy, tenants now have more leverage in the negotiation process and will continue to ask for concessions, whether it be more free rent, bigger tenant improvements or rent abatement," Perez said.

One surprising area of growth, not just locally but across the country, remains the discount or dollar store market. Figures Perez cited from commercial real estate analysts at Costar Group, show that 945 new "dollar stores" are planned in 2009. Last year the sector saw 704 openings.

"It's typical of a recession," Vest said. "People are going to mass merchandisers."

He noted the Target and Walmart chains also remain strong despite the sour economy.

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