Fluctuations in common area maintenance (CAM) charges impact both retailers and landlords alike. Consequently, skilled property managers keep a sharp eye on the bottom line without sacrificing service levels. Pricing from service providers has remained fairly constant, and we have continued to leverage PICOR's buying power in the market, reducing CAM costs for such services as waste removal and pest control, to benefit owners and tenants of Tucson commercial real estate.

Comparing the latest annual expenses (2011) to the previous  year, operating expenses increased approximately 20% overall in 2011, ending the year at $4.40 per square foot.  With larger expenditures such as roof coating, parking lot sealcoating and landscaping upgrades back burnered during the recession, some property owners moved forward and completed those needed improvements in 2011.  Those expenses are included in the Repairs & Maintenance and Roads & Grounds categories on the chart.  Utilities and Real Estate Tax costs increased in 2011 over 2010, with a 21% increase in real estate taxes alone.

Rent delinquencies are down overall for tenants of Tucson shopping centers and other retail properties, and rent reduction requests are now few and far between.  Businesses appear to be more optimistic about the future, but the majority do not appear to be ready for expansion into new locations.  Local "mom and pop" businesses continue to struggle in many instances; however, that is not out of the norm.  

As with industrial properties, the mood in the Tucson retail market is “cautiously optimistic,” a sentiment equally prevalent with tenants and landlords.  Shopping center owners and property managers who provide excellent customer service to their tenants, including diligence in keeping expenses in check, along with thinking “out of the box” for synergistic cross-marketing opportunities for their tenants, will be the winners in retaining their tenants in the future.

Click for a companion review of 2011 industrial operating expenses.

Eileen M. Lewis, RPA FMA leads PICOR’s property management division and is one of 13 principals. A long-time Tucsonan and 26 year veteran of the commercial real estate industry, Eileen has managed a portfolio of industrial, retail, and office buildings for private and institutional investors and served as Receiver for distressed assets. An active industry leader locally and nationally, she has served the Building Owners & Managers Association (BOMA), Commercial Real Estate Women (CREW) and others. 

Photo source: Gary Rumack Photography

21st CENTURY HEALTHCARE DELIVERY

Economic pressure is one of the forces remaking the practice of medicine. The medical community is highly attuned to the present and future implications of healthcare reform at the federal level.  Large healthcare systems are re-thinking the nature, shape and organization of their delivery systems from top to bottom.  They are forming new relationships and alliances and adopting cutting edge technology.  Individual medical practices are under the same pressure to identify efficiencies and economies and to ally with related health care providers.  Large private and public medical groups continue to grow in size and influence.  Continuous progress at advanced medical research facilities, coupled with a technology explosion in research labs permitting worldwide scientific collaboration, are additional forces evident in the healthcare community.  The developers and owners of real estate serving the industry must become informed and knowledgeable about the pending revolution in healthcare delivery in order to respond to new realities and processes.

In the recent past, healthcare practices were physically disassociating from healthcare campuses and pursuing ownership opportunities in reasonable proximity to the “mother ship.” They were frequently locating in small freestanding buildings intended for a single practice.  The nascent pursuit of efficiency and economy will cause a re-think of the importance of location as family medicine practitioners become the gatekeepers of a system that then moves the patient on to specialty care and treatment. Aftercare is an increasingly important aspect of the medical insurance reimbursement formula.    Systems that monitor post-procedure care and reduce re-admissions to acute care will reap financial rewards.

Women’s healthcare and pediatric medicine are examples of practices that will explore co-location and shared management systems from electronic medical records to 24/7 utilization of facilities.  Why should a non-acute healthcare delivery system shut down for 16 hours a day?  Expanded hours will improve efficiencies, improve return on investment in physical assets and expand availability of services to the public.

The Accountable Care Organization (ACO) is a system of member healthcare providers from acute care hospital to the individual practice and all health delivery personnel formed to create efficiency, control cost, improve patient outcomes and improve the bottom line.  These organizations are being established around the country, spurred by federal healthcare reform and prodded by decreasing reimbursements from private and public insurance groups.

It has to be said that technology, especially in the management of patient records, is the game changer that initiated the re-shaping of the future of healthcare delivery.  With one electronic medical record (EMR) of a patient, ONE chart, secure and shared by all member providers in an ACO, all systems accelerate, from registration to diagnosis to treatment, discharge, after care and post care monitoring. The aim is to do it all once, do it right the first time with everyone on the same page for the benefit and successful treatment of the patient.  Patient time is not wasted, travel time is not wasted. Errors, possible and dangerous, are all reduced.  Coordination, collaboration, communication are all improved and contribute to the welfare of the patient.  These factors result in an improved financial reward for the provider. This progress comes, however, at a very significant investment in new hardware, software and training.

THE MEDICAL BUILT ENVIRONMENT

Medical real estate is changing in response to the forces delineated above.  Practitioners are joining in larger expanded practices.  They are becoming employees of larger systems because the costs of operating individually are prohibitive.  Specialists have historically operated when and where they wish.  Even this community is responding to the changing landscape and is forced to recognize the imperatives of economy and improved patient outcomes in the world of insurance reimbursement.

We are beginning to see the impact on real estate in Tucson.  Practice size is growing. Practices are looking at the benefits of co-locating.  Sole practitioners are declining in number due to both the crushing financial burden of operating a practice and declining reimbursements.  Conversion to electronic medical records is beyond the means of most sole practices.

At the same time that many related medical practices are exploring and considering the changing environment and desirability of co-location, there is a growing trend of retail medicine in distributed settings like strip and shopping centers.  Urgent care facilities are increasingly absorbing some of the tidal wave of patients that have swamped hospital emergency departments.  Prompt care for non-acute problems results in short visits and keeps people away from hospital environments intended for really sick people and where diseases can be transmitted.

The new West Pavilion at Tucson Medical Center, a 200,000 square foot (sf), four story structure, serves as a timely manifestation of the trends discussed here.  The Tucson Orthopaedic Institute clinical and administration operation will move from its present quarters at 2424 North Wyatt to the 50,000 sf ground floor of the new Pavilion.  The second, third and fourth floors of the building will be dedicated to 24 operating rooms and patient rooms. This arrangement puts the orthopaedic surgeon a brief elevator ride from their office and clinical space to the operating room (OR).  After a procedure, patients are moved from the OR and post op to a room a floor or two above. All activity is controlled and collected in one electronic medical chart. Post-surgical physical therapy, medications, planned after care and follow-up are all detailed and shared by the medical team treating the patient. Surgeon, anesthesiologist, surgical and general nurses, therapists, pharmacists and specialty treatment technicians are coordinated and informed of the patient’s status throughout treatment via the electronic medical record. Patient outcomes improve, hospitals and practitioners improve their finances through reimbursement incentives, and hopefully this type of technological and physical arrangement will begin to have a favorable impact on the costs of healthcare.

Tom Knox's commercial real estate career dates to 1977 where he began as a broker at CB Commercial Real Estate then was promoted to leadership positions including Resident Manager and VP in 1982 through 1990. Thereafter and together with his JV partner, Tom provided real estate services to the Resolution Trust Corporation, the FDIC and The State of Arizona. In 1995, he joined PICOR and is now one of 13 company principals. He specializes exclusively in office, medical and investment properties.

Rick Kleiner, MBA, with PICOR since 1995, is a Principal specializing in the sale, leasing and investment of office and medical properties. With special emphasis on the real estate needs of the health care industry, Rick focuses on business solutions for medical practitioners and associated services. In 2011, Rick led the Office Division as Top Producer.  Prior to joining PICOR, Rick served as Vice President of Marketing for Up With People.

Tom Nieman, specializing in commercial real estate since 1977, possesses a diverse background in brokerage, development, and management. He joined PICOR in 1995, focusing on the office, medical and investment markets, becoming a Principal in 2001. He excels in providing the best solutions to the real estate requirements of developers, landlords, tenants and investors. 

First published in TREND Report, May 2012. For subscription information, contact Lucinda Smedley, Publisher.

Photo credits: AlterGroup.com, Inside Tucson Business, Gary Rumack, Lyn Sims

The following is an account of the Tucson market’s select top five industrial lease transactions for first quarter 2012.

WESCO Distribution renewed 18,424 square feet at 1150 S Plumer Ave. in Tucson. Bill Honsaker of Jones Lang LaSalle represented the tenant. Paul Hooker of PICOR Commercial Real Estate Services represented the landlord.

Pro Em Party Concepts renewed 18,192 square feet in Butterfield Corporate Plaza at 4691 S Butterfield Drive in Tucson. The tenant did not have representation. Russ Hall and Stephen Cohen of PICOR Commercial Real Estate Services represented the landlord.

Preferred Home Care renewed 17,260 square feet for five years in Broadbent Business Park at 2155 N Forbes Blvd. in Tucson. Ken Jinks of Sureway Properties represented the tenant. Rob Glaser of PICOR Commercial Real Estate Services represented the landlord.

Trane US, Inc. renewed 16,795 square feet in Broadbent Business Park at 2155 N Forbes Blvd. in Tucson. The tenant did not have representation. Rob Glaser of PICOR Commercial Real Estate Services represented the landlord.

TPS Builders leased 12,664 square feet at 2699 E Valencia Road in Tucson. PICOR Commercial Real Estate Services represented both sides of the transaction. Paul Hooker represented the tenant, while Rob Glaser represented the landlord.

The information in this news report is based on CoStar’s First Quarter 2012 Market Report, a 40+ page comprehensive research report available to CoStar subscribers. To learn more about quarterly research reports and other benefits available to CoStar subscribers, please call 888-226-7404.

Where are the jobs? The substantive, significant jobs?

New first quarter 2012 data show that despite growing optimism, the hard numbers depict an uneven, grinding improvement in the Tucson region.

In the industrial sector, “the Tucson real estate market is taking its time catching up with the national economic recovery. While activity ebbs and flows, it has not yet translated into meaningful job growth,” said Paul Hooker, industrial property specialist with Picor Commercial Real Estate Services.

Tim Healy, vice president at CBRE, described the sector’s activity as moderate. CBRE tracks private sector, owner and non-owner occupied buildings of 10,000 square feet or larger.

For the first quarter, net positive absorption of about 50,000 square feet nudged the vacancy rate down to 11.2 percent from 11.4 percent at the end of 2011.

Most notably, industrial occupants continued to abandon the city’s southeast and southwest submarkets, where 34,000 square feet has been vacated since January. Meanwhile, preference for northwest sites continued, with the region’s largest positive absorption at 29,300 square feet.

For the industrial sector as a whole, CBRE reported the average asking lease rate increased 13 cents per square foot from the end of 2011 to $6.48 in the first quarter.

The retail sector posted its fourth consecutive quarter of modest growth, ending with positive absorption of about 100,000 square feet. The move to better quality locations, again mostly in the northwest submarket, continued.

“Slow but steady progress is the most accurate way to characterize Tucson’s retail market. Migration from unanchored retail to grocery-anchored is a clear flight to quality as landlords compete for too few tenants,” said Greg Furrier, a principal with Picor.

The quarter ended with an overall vacancy rate of 11 percent, compared to 11.6 percent in the 2011 fourth quarter, said Alan Tanner, first vice president at CBRE. The average asking lease rate declined to $18.12 per square foot in the first quarter from $18.45 at the end of 2011.

“Reductions in the asking rate are likely to persist until vacancy drops even lower, especially among mid-block and non-anchored centers,” Tanner said.

The biggest increase in absorption occurred in the northwest submarket that gained about 50,000 square feet. The only area to lose space during the quarter was the southwest submarket, losing about 5,000 square feet of occupancy, according to CBRE.

Both Picor and CBRE reported that national retailers, including large big box operators, are actively searching for space in prime locations.

In the office sector, steady improvement is expected to hold until 2013. Quarter-over-quarter, vacancy rates improved to 11.7 percent from 11.8 percent, giving the market “a sense of stability for the first time since 2008,” said Picor principal Rick Kleiner. “Medical uses represent the strongest demand and will remain a primary growth industry for the region.”

Although no submarket posted a drastic change in office vacancy, the northwest area again saw the strongest growth, absorbing just over 39,000 square feet of space. The entire market posted positive 33,500 square feet of absorption for the quarter, according to CBRE.

The average asking rental rate for multi-tenant office space decreased for the third consecutive quarter, falling to $18.65 per square foot form $19.19 at the end of 2011.

“The office market is one piece of evidence depicting modest progress. Yet the continued decrease in lease rates indicate it has yet to show significant signs of improvement. Because of its dependence on employment, it is unlikely substantial improvement will occur until hiring activity increases at a higher rate,” said Dave Montijo, first vice president at CBRE.

Source article on Inside Tucson Business.

The Tucson Industrial market ended the first quarter 2012 with a vacancy rate of 11.8%.

The vacancy rate was up over the previous quarter, with net absorption totaling negative 66,319 square feet in the first quarter. Vacant sublease space increased in the quarter, ending the quarter at 323,507 square feet.

Rental rates ended the first quarter at $6.27, a decrease over the previous quarter.

There was 81,000 square feet still under construction at the end of the quarter.

This trend is compared to the U.S. national industrial vacancy rate, which decreased to 9.3% from the previous quarter, with net absorption positive 30.71 million square feet in the first quarter.

The information in this news report is based on CoStar’s First Quarter 2012 Market Report, a 40+ page comprehensive research report available to CoStar subscribers. To learn more about quarterly research reports and other benefits available to CoStar subscribers, please call 888-226-7404.

PHOENIX BUSINESS JOURNAL
Patrick O’Grady
May 2, 2012

Arizona Commerce Authority names finalists for Innovation Challenge

Don Cardon

The Arizona Commerce Authority has whittled a list of more than 300 entries down to 10 finalists for its $1.5 million Innovation Challenge.

ACA officials announced the finalists Wednesday, which featured a mix of technology companies the authority is hoping will become a base for innovation and growth in the state’s economy.

“The ACA received hundreds of applications, and while only a select few are moving on to the finals, I am continually impressed by the level of talent and innovation Arizona’s great minds have to offer,” said Don Cardon, president and CEO of the Arizona Commerce Authority, in a statement.

The finalists are:

• Acudora, a Tucson-based company specializing in audio technology for musicians, television and film.
• Agave Semiconductor, a Phoenix-based manufacturer that specializes in motor and fan control components.
• Cancer Prevention Pharmaceuticals, a Tucson-based company specializing in treatment of the disease.
• HJ3 Composite Technologies, a Tucson-based manufacturer that specializes in carbon fiber and other composite materials used in array of products.
• Kutta Radios, a Phoenix-based developer of communication equipment used in mining.
• MaxQ Technology, a Tempe-based manufacturer that specializes in temperature management for electronics.
• PathoGene, a Flagstaff-based medical diagnostics company that works on identifying infectious microbes.
• Serious Integrated, a Chandler-based based touch-panel development company.
• SyCara, a Scottsdale-based developer of search engine optimization software and analytic business tools.
• Wholesalefund, a Scottsdale-based software developer specializing in getting products through distributors.

The finalists will be required to make a pitch to contest judges, and winners will be announced May 15.

The contest developed by the ACA will run twice a year with the goal of getting $3 million into the hands of startups in the state. Winners are required to commercialize their technology within one year of the award.

A sustained increase in consumer spending helped drive U.S. industrial users to absorb 13.6 million square feet of warehouse/distribution space in the first quarter of 2012, the market’s highest first‐quarter total since 2005.

• The increase in spending is reflective of an environment in which consumers are proving more upbeat about their personal finances. The Conference Board’s measure of present conditions – a monthly index calculated on the basis of a household survey of consumers’ opinions on the current health of the economy  ‐ increased to 51.4 in April, its highest level since September 2008. The metric had fallen as low as 21.1 in October 2009.
• While headwinds persist, the readings were critically accompanied by a 0.4% March increase in incomes, the most in three months as evidence of a sustainable rebound gathered.
• With all of the warehouse/distribution occupancy surrendered during the recession reclaimed by year‐end 2011, the segment enters the remainder of 2012 ready to transition into the next phase of recovery.

Neil.Hamilton@cushwake.com  (407)541‐4417

The Census Bureau released a report on annual state government tax collections April 12 (it was revised April 17).  It stated that overall collections for states increased $55.7 billion in fiscal year 2011 to $757.2 billion. All states saw an increase in total tax revenue.  The change for Arizona (6.48 percent) was below the U.S. (7.94 percent) and far from the state with the highest change, which was North Dakota (44.47 percent).

Arizona had the highest foreclosure rate in the nation for March with one out of every 300 housing units in foreclosure, according to RealtyTrac. Arizona’s rate actually dropped 41 percent in March. However, Nevada’s rate dropped even more (62 percent), placing it second.  Until this month, Nevada has continuously had the highest monthly foreclosure rate in the nation since the beginning of 2007.

Arizona’s unemployment rate for March was 8.6 percent according to the Arizona Dept. of Administration news release of April 19th. This figure is down 1.4% from a year ago, and represents a one-tenth of one percent decline from the previous month. Arizona added 18,900 nonfarm jobs in March.

Initial unemployment claims filed in Arizona rose significantly during the first week of April, climbing to 7,805 compared to 4,771 in the week previous. In the second week of April claims declined slightly to 7,080. But, the 4-week moving average for claims has now climbed for 3 consecutive weeks to 6,120. At the national level, with an additional week of data available (through 4/21/12), the four-week moving average for claims has now risen for 5 straight weeks, see table below.

The Consumer Price Index for all Urban Consumers (CPI-U) rose 0.3 percent in March on seasonally adjusted basis, according to data released Friday, April 13th from the Bureau of Labor Statistics.  The 12-month change in inflation was 2.7 percent before seasonal adjustment.

Producer Price Indexes released on April 12th.  Prices for finished goods were unchanged for March. The unadjusted year-over-year figure was 2.8 percent. This was the smallest 12-month change since June 2010.

For additional information, please contact the Economic and Business Research Center.

In the state of Sonora, Mexico, several projects are underway in different parts of the state. In Nogales, a city adjacent to the border, Puerta de Anza is under construction. This is a quality, master-planned community incorporating residential, industrial, retail, office and recreation. It is being dubbed the “New Nogales.” Housing is currently being built, and developers take pride in the project’s status as one of only two projects in the nation with the DUIS certification. The DUIS designation stands for “Integrated Sustainable Urban Development” and is similar to the LEED certification in the United States. When visiting the site, one can see that solar production areas, water treatments plants, parks and recreation are being constructed as part of the project.

Another progressive development is Nogales Sur, located south of the city of Nogales. This project also combines residential and commercial/industrial areas to better serve the companies establishing initial operations in Mexico, relocating or expanding, and also to house their employees near—sometimes within walking distance --their jobs.

Moving farther south in the state of Sonora, a significant project will be coming to Hermosillo, the capitol of the state. Ford Motor Company established in Mexico in 1925 and has recently announced a $1.3 billion investment at a plant in Hermosillo, Sonora. This plant has received awards recognizing quality and operations.

In Guaymas, the seaport city some 250 miles south of the U. S. border, a concerted effort is underway to lead as Sonora’s Aerospace cluster. Companies from all over the world are making their aircraft components in Guaymas with the high quality needed to meet worldwide standards, as well as the competitive costs they need to assure they stay in business.  

Closer to home on the U.S. side of the border, we call attention to the Mariposa Port of Entry. This major investment in an expanded port of entry under construction will benefit both countries, both states, and the region, as Nogales is the most important port of entry in the region. Phase I was delivered four months ago, and Phase II is well underway, with an impressive infrastructure that will help expedite the crossing of goods between the United States and Mexico, reducing costs to business and consumer alike.

Competitive costs, focused service, high skilled labor force, along with the recently announced expansion to the Port of Guaymas and the current expansion of the Mariposa Port of Entry in Nogales, will surely benefit the business climate in the Arizona–Sonora region. Together we are working to bring our residents great education, breadth of employment opportunities, and an overall enhanced standard of living and quality of life.

PICOR has a ten-year commitment to the border region and a 27 year history in Southern Arizona. PICOR is incorporated and licensed to sell real estate both north and south of the border. We are committed to helping companies establish their operations, whether first time, relocation or expansion.

Mike Hammond SIOR CRE is PICOR’s President, Founder and Managing Shareholder, and leads the firm’s activity in the border region, specifically, the state of Sonora, Mexico, where PICOR is incorporated and licensed.  He has been a sales and marketing trainer for the national Society of Industrial and Office Realtors (SIOR) for 20 years, is a Counselor of Real Estate (CRE) and is active in regional leadership with the Urban Land Institute (ULI). 

Denisse Angulo, A bilingual native of Sonora, Mexico, Denisse began at PICOR in 2005 as an intern, then launched her career as coordinator of the Alpha Group focusing on the industrial market. Today she is a regional marketing specialist advising companies and investors on both sides of the border in both English and Spanish. Denisse is licensed to sell real estate on both sides of the border, and is currently working on her MBA.

Photo credits: ProNogales, O'Connor Construction, Gary Rumack

For a get-together with no set program, Mike Hammond runs a terrific business “roundtable.” Once a year “or whenever,” the president and CEO of Picor Commercial Real Estate Services hosts about 25 business-related guests for lunch.

Picor’s principals and brokers are required to attend and bring a guest. Hammond emcees the luncheon, telling everyone, “We are here to have an open dialogue on business. There is no specific agenda.”

On Tuesday (April 24), a diverse mix of executives and managers gathered at the Arizona Inn. Among the organizations represented were Raytheon Missile Systems, Solon Corp., Merrill Lynch, Chase Bank, Arizona Commerce Authority, Metropolitan Pima Alliance, Diamond Ventures, University of Arizona, United Way of Tucson and Southern Arizona, Holualoa Companies, Miramonte Homes, Microbusiness Advancement Center, Tucson Mayor Jonathan Rothschild’s office, and Inside Tucson Business.

With a firm grasp of time, topics, and the talent in the room, Hammond led the group through a lively discussion across many subjects. Among the notable comments:

• Jay Meridew, vice president of finance for Solon, said China has over-produced solar modules to the point that “no one can make money manufacturing them.” That has forced several foreign firms and Solon out of the production business.

Basically, the Chinese government is subsidizing solar’s global growth and “eating the losses,” he said.

The over-supply has driven down panel costs from about $1.70 to 90-cents per watt. In Tucson, that means it is now possible to get a six- or seven-year payback on residential solar without any electric company incentives or tax credits.

• Ken Chapa, business attraction manager for the Arizona Commerce Authority, talked about economic development. Due to rising fuel costs, “land and buildings near rail lines or spurs are popular. Most inquiries are coming from California and Texas,” he said.

Typically, clients who contact him provide a list of specific needs, which are then distributed to applicable economic development groups for their review. The Arizona Commerce Authority does not try to steer businesses to any specific part of Arizona.
Locally, Tucson Regional Economic Opportunities “is an important partner. This is their back yard,” he said.

• Chris Kemmerly, owner of Miramonte Homes, is feeling more positive about real estate. Coming out of the housing crash, three home closings a month was a volume that became a sales norm.

“This month, we will sell 10 homes. I am ecstatic,” he said. “Our housing market’s supply-demand balance point is six months. Tucson is down to four months of inventory. Officially, that puts us in a seller’s market.”

But rising materials prices and a chokehold on available land tempered his enthusiasm a bit. With material costs projected to increase 20 percent this year, “new home prices will spike.”

• Very carefully, public policy vice president Priscilla Storm of Diamond Ventures explained a sensitive political issue. With local governments facing ongoing budget issues, several elected officials have called for more public-private partnerships to help fix some community problems.

“There are issues with public-private partnerships,” she said. “Business has a major concern; will their private dollar investments be well-cared-for by government?”

Contact reporter Roger Yohem at ryohem@azbiz.com or (520) 295-4254.

More about PICOR

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• ARTICLE: Small business leases trend up
• ARTICLE: Small companies picking up space
• ARTICLE: BOMA economic forum to feature Rothschild, Pace and job creation