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TUCSON-A loss of major tenants has caused increases in vacancy rates in the office sector in Greater Tucson, causing the northwest portion of the market to suffer from negative absorption for first time in years during 2007. On the bright side, leasing activity continues and rates nudge upward, according to latest office market surveys from CB Richard Ellis and Picor Commercial Real Estate Services, a Cushman & Wakefield Alliance member.

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

Overall, the Tucson office vacancy rate for yearend 2007 stood at 12.61%, up from 11.01% at mid-year and up from 11.98% in 2006. Picor researchers point out that “inevitably the continuing popularity of office space ownership has taken a toll and vacancies in multi-tenant properties surged from 10.9% in March to 13.4% in September ’07.”

Downtown Tucson recorded absorption of 52,995 sf, primarily due to Pima County taking space in the Bank of America building. The North Central and East Central areas also posted positive absorption numbers, but the northwest submarket “broke its trend of positive absorption in 2007″ by registering negative 74,496 sf at the end of the year, according to CBRE. Approximately 100,000 sf of office product is under construction and another 45,000 sf is set to break ground in 2008.

Although there are some signs that user sales are slowing, investors have been active in the market already this year, with deals like Grubb & Ellis Realty Investors LLC’s sale of a 135,760-sf class A office building at 2800 E. Commerce Center Place for $21.6 million to a San Jose, CA-based company making its first out-of-state acquisition. The deal closed with a new 10-year lease by the building’s sole occupant, software maker Intuit Inc.

As of the latest reports, the lease rates for office space were holding, with average asking rents at $22.59 per sf in comparison to $22.25 per sf at the end of 2006. “With overall market rents showing considerable strength, several new office projects have elected to implement triple-net rent structures,” CBRE researchers report. In 2003, only 14 office projects employed the NNN rent structure, but by the end of 2007 the number had grown to 34. One factor pushing up rents, according to CBRE, was that much of the leasing in 2007 was in newer buildings that command higher rents than the old product.

Among the factors supporting the rent growth are favorable demographic trends, a stabilizing university presence and an attraction for outside businesses, the reports indicate. However, the CBRE study concludes “low per capita incomes and fluctuating defense spending are sources of weakness.”

Picor’s report shows that although 2007 “was yet another banner year in the office building marketplace” in Tucson, the last half of the year “was not kind to multi-tenant building owners.” The C&W affiliate’s study points out economists at the University of Arizona and Arizona State University have predicted a softening of economic conditions statewide. “As a consequence, we believe that this year will be challenging for select sectors of the office market,” the firm’s researchers conclude. The report forecasts very little new speculative multi-tenant office construction and observes that in this changing market “quality locations that offer good access will be favored by decision-makers.”

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