Tucson Remains Hot for Retail Investors

"As Tucson approaches the one million population mark, which is only a few years away, we'll continue to see a strong influx of retail brands," Dale Webber, an investment associate with Marcus & Millichap, tells GlobeSt.com. "It's a very hot market right now."

A study of Tucson's retail growth, commissioned by Marcus & Millichap, shows that an increase in jobs, particularly in the professional and business sectors, will bolster retail growth by 5.1% this year, as 7,500 new employment opportunities are added to the Tucson job market. While new construction will decline to about 400,000 sf from2003's banner year of 750,000 sf, the opening of more upscale centers like La Encantada in the Catalina Mountains, will likely spur additional projects in the surrounding area, the report notes.

The drop in construction activity also will enhance the occupancy rate in existing retail projects with vacancy projected to fall 30 basis points to 6% by year's end. The growth of larger retailers is expected to absorb existing big-box space across the region with the average retail rental rate climbing 43 cents to $15.70 per sf, up from last year's figure of $15.27 per sf.

Investors also are likely to remain hot on the Tucson market, allowing prices to remain firm on high-quality properties. An influx of out-of-state buyers, enamored with Tucson's higher cap rates, will continue to keep the market churning.

"We are seeing very strong interest from other markets," Webber says of the strong interest in Tucson by out-of-state investors. "It's a phenomena, partly because investors, particularly in California, are not finding investments with any good yield so they are looking to Arizona. As real estate investors continue to struggle to find product in their own market, they are looking to ancillary markets, including Tucson." Multi-tenant properties will continue to remain strong investment vehicles, putting more pressure on prices as investors compete for properties.