Industrial Watchers Wary About 2008 Market

"That segment is tied to job growth. And given the economy, we aren't likely to see much of that in the coming year," says William L. DiVito, first vice president with CB Richard Ellis in Tucson. He adds consolidations and downsizing most likely will add more space to a market that was doing fairly well until late 2007.

According to CBRE's fourth quarter 2007 report, the year ended with vacancy at 5.45% in the 34.7-million-sf inventory and net absorption of 885,207 sf. Developers last year added 546,323 sf to the industrial market. Locally based Picor Commercial Real Estate's yearend report pegs vacancy at 5.1%, absorption at 390,996 sf and the inventory at 16.3 million sf. According to Picor, 1.5 million sf is under construction, of which 1.2 million sf is either preleased or presold.

DiVito points out that there isn't much speculative industrial space under way due to Tucson's size and the cost of construction versus rents. "We've always been a small market and that's put a restriction on new supply," he tells GlobeSt.com. "People get nervous about building spec here."

Additionally, DiVito says the disparity between lease rates and construction costs has hindered larger developments. However, spec has become a possibility since the average annual rate is up to $8.53 per sf from $7.52 per sf at midyear, according to the CBRE report. "The question is how much velocity will you have at higher rates to absorb a larger project," DiVito says.

However, construction is likely to falter because of the economy. "I don't think any smart developer is building anything at this point," DiVito says.

DiVito and Robert L. Davis, a first vice president in CBRE's Tucson office, agree that the situation could change over the long term. The recent groundbreaking of Target Corp.'s one-million-sf distribution center near Interstate 10 and Rita Road in the southeast submarket could be a drawing card for developers. "This is the second center they're building. The first one was near their headquarters in Minneapolis," Davis says. "It's nice Tucson can get that type of product and it speaks well for the area."

Both men say they don't expect a flood of development to come anytime soon. First, Target's distribution center won't open for another two years. Secondly, Davis points out major projects will require several years to develop.

DiVito acknowledges that everyone is waiting on the sidelines to see what will happen. "They're waiting for the economy to turn around," he says. "It'll happen, but maybe not until next year."