The CBRE study tracks business services buildings of 10,000 sfand larger, which "continued to show some volatility in 2007 withlower absorption and construction numbers than 2006," according tothe CBRE report. The study suggests that one reason for the changeis that some businesses have delayed expansion or relocation plans"until the economy shows its hand." Vacancy remained high in theNortheast and East Central submarkets, 23% and 14% respectively,with several large buildings in those submarkets vacated byowner/users.

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Overall, the Tucson office vacancy rate for yearend 2007 stoodat 12.61%, up from 11.01% at mid-year and up from 11.98% in 2006.Picor researchers point out that "inevitably the continuingpopularity of office space ownership has taken a toll and vacanciesin multi-tenant properties surged from 10.9% in March to 13.4% inSeptember '07."

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Downtown Tucson recorded absorption of 52,995 sf, primarily dueto Pima County taking space in the Bank of America building. TheNorth Central and East Central areas also posted positiveabsorption numbers, but the northwest submarket "broke its trend ofpositive absorption in 2007" by registering negative 74,496 sf atthe end of the year, according to CBRE. Approximately 100,000 sf ofoffice product is under construction and another 45,000 sf is setto break ground in 2008.

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Although there are some signs that user sales are slowing,investors have been active in the market already this year, withdeals like Grubb & Ellis Realty Investors LLC's sale of a135,760-sf class A office building at 2800 E. Commerce Center Placefor $21.6 million to a San Jose, CA-based company making its firstout-of-state acquisition. The deal closed with a new 10-year leaseby the building's sole occupant, software maker Intuit Inc.

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As of the latest reports, the lease rates for office space wereholding, with average asking rents at $22.59 per sf in comparisonto $22.25 per sf at the end of 2006. "With overall market rentsshowing considerable strength, several new office projects haveelected to implement triple-net rent structures," CBRE researchersreport. In 2003, only 14 office projects employed the NNN rentstructure, but by the end of 2007 the number had grown to 34. Onefactor pushing up rents, according to CBRE, was that much of theleasing in 2007 was in newer buildings that command higher rentsthan the old product.

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Among the factors supporting the rent growth are favorabledemographic trends, a stabilizing university presence and anattraction for outside businesses, the reports indicate. However,the CBRE study concludes "low per capita incomes and fluctuatingdefense spending are sources of weakness."

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Picor's report shows that although 2007 "was yet another banneryear in the office building marketplace" in Tucson, the last halfof the year "was not kind to multi-tenant building owners." TheC&W affiliate's study points out economists at the Universityof Arizona and Arizona State University have predicted a softeningof economic conditions statewide. "As a consequence, we believethat this year will be challenging for select sectors of the officemarket," the firm's researchers conclude. The report forecasts verylittle new speculative multi-tenant office construction andobserves that in this changing market "quality locations that offergood access will be favored by decision-makers."

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