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TUCSON-Fueled by a demand from the local tourism industry, retail construction is expected to increase in Tucson next year, even as vacancy rates continue to rise. That’s the outlook from Marcus & Millichap Real Estate Investment Brokerage Co., which recently released its retail research report for the Tucson market.

“Tucson is a good, solid market,” Tim Rios, client services manager for Marcus and Millichap, tells GlobeSt.com. “It’s not a high-profile market, but it’s one where people find good product and hold onto it.”

Because that buy-and-hold strategy has left little available for sale, retail investment activity remains slow in Tucson, the report notes. But retail space in this city two hours south of Phoenix is growing. In 2002, developers added 250,000 sf in the first three quarters, representing less than a 1% increase in inventory. Retail construction is expected to soar to 750,000 sf during 2003, however, largely due to the opening of big box stores such as Wal-Mart, Lowe’s and Home Depot. Those three chains will account for more than half of all retail completions during 2003.

The news is mixed for building owners, however. Even though absorption rates experienced a marked improvement in the first three quarters of 2002, vacancy rates are expected to rise 0.4 percentage points over the next 12 months, to 6.5%. Vacancy levels had dropped to 6.1% during 2002, but still remained 0.7 percentage points above a year earlier.

But for building owners, there is one bright spot. Rents are expected to continue rising in 2003, increasing by 3% to an average of $15.45 per sf. After stalling for the last half of 2001, rents made a turnaround and increased by 1.5% through the first three quarters of 2002 to an average of $15 per sf, the report found.

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