Like pink diamonds, real estate in the Northwest is coveted, expensive and increasingly rare.

While the market is sparkling all over the greater Tucson area, the Northwest is faced with high demand and low supply, according to remarks made by agents at Tucson Realty & Trust Co. during a recent seminar.

This 2004 trend is likely to continue throughout 2005, they said.

Building outside the Tucson city limits, including the in Northwest, is an increasingly popular option, though not one without its consequences, according to Lance Jones, land specialist at Tucson Realty & Trust Co.

"What little land that is available within a reasonable distance from Tucson, and reasonably priced, comes with some pitfalls, including rural commutes, water issues and zero tax benefits from Pima County," he said.

The limited supply of land and other real estate is creating concern for Jones and others.

"My forecast will be a slight tapering off in sales due to lack of supply," he said.

In places where land and real estate are available, the company said they are being snatched up quickly, often by out-of-state investors, particularly Californians.

George Stamos, an investment specialist at the company, said buyers looking for property at rates relatively inexpensive compared to their hometowns are flocking to Tucson.

"The 2004 commercial real estate market was driven largely by an exodus of funds from the stock market and an influx of funds from out-of-state buyers, pushing cap rates to lows that have not been seen in years," he said.

Again, availability is the problem.

"Despite moderate increments in interest rates and a pull back of stock market funds, the investment market will continue to see growth," he said. "The problem, however, is that although demand may be as strong as 2004, it will be difficult to find investment properties to purchase."

With premium real estate hard to come by, Stamos said many investors are looking to less satisfactory lots - either ones that need work or repurposing to suit another need.

"Look for investors to purchase larger assets, reposition and split them into smaller spaces," he said. Industrial spaces between 5,000 and 50,000 square feet still remain available and sales will remain "energetic" in the coming year, Stamos predicted.

Industrial-type leasing space has been freed up by Slim Fast and Wiser Lock leaving town, according to Patrick Welch, an industrial specialist. However, industrial spaces still are in high demand, he said, particularly spaces smaller than 10,000 square feet, which are popular with local businesses.

The Tucson retail market consists of some 40.4 million square feet of space, she said, with some 17 million of that being streetside commercial space and 23 million shopping center space.

While streetside retail spaces showed a slight increase in vacancy rates from 8.5 percent to 9.5 percent vacancy in 2004, shopping center availability decreased at the end of 2004, dropping from 11.5 percent to 8.9 percent.

Some of that can be attributed to projects that still were on the drawing board last year being constructed and leased.

Large retail centers throughout the city also have included national retailers such as Target, Bed, Bath & Beyond and Pier 1 Imports. She said some national chains may be starting to realize that, because of sprawl in Tucson, "to service this market, to take advantage, you really need to have multiple outlets," she said.

New retail projects in the works for the Northwest include construction near the Tucson Mall at the southeast corner of Oracle and Wetmore roads.

"The project has a national lineup of prospective tenants, including a possible new store for Home Depot," Heslop said.

At Orange Grove and River roads, new retail buildings are under construction, she said, including a Bedosian tile showroom and warehouse and a WestStar Appliances.

Larsen Baker's new Design Center at Orange Grove and Thornydale roads is attracting furniture retailers, Heslop added, and a 46,000 square foot Sportsman's Warehouse is slated for the CostCo Plaza area off of Thornydale.

One area where the Northwest has cool real estate forecasts is in the ranch and farm land sectors. Richard E. Johnson, associate broker at Tucson Realty & Trust Co., said the Northwest and Marana have seen little activity in those sectors, especially considering most of the existing cotton farms are on state land.

Despite this, Tucson Realty & Trust Co. has high hopes for the coming months.

Last year "was an all-time, record-setting year for home closings, single-family residence permits issued and the average home sale price, which has a direct correlation to the land market, which also experienced its best year since 1986," Jones said.

Heslop said the retail forecast also is sunny, with more shopping options throughout the city and vacancies declining.

But Marshall Vest, director of the Economic and Business Research Center at the University of Arizona, tempers the news of this still piping-hot market with what could be the sobering reality of a real estate bubble on the verge of popping.

"People are eager to buy because they want to get in on the run-up in prices and that's OK as long as prices keep going up," Vest said. "But if for some reason that flow of money was interrupted or if investors got nervous and decided that the market had peaked and that money disappeared and everybody put their newly acquired property on the market, then the market could turn on a dime."

Vest said he expects the market to stay level at least partially through the year, but said he will be keeping an eye on the supply of available real estate and the expectations of those looking to buy or sell.

"Number one is the inventory of unsold homes," Vest explained. "Right now inventories are very low. If inventories go up, that's the first indication of trouble. If buyers start canceling contracts, that's another indication that the market is about to change."

Keeping expectations realistic also is a key to maintaining market stability.

"Many buyers are expecting housing prices to go up 20 percent a year each and every year for the next five or 10 years, and it's not going to happen," he said. "Housing prices normally go up about the same rate as overall inflation. Nowadays the core rate of inflation is two percent. Unreasonable expectations for future price increases is what you need to guard against."

"I can't tell you whether there's a bubble but I'm seeing some of the symptoms you find in overextended markets, bubble kinds of markets," Vest said. "But at some point this tremendous flow of money is going to ebb and the run up in prices is going to disappear and prices will be flat, probably for an extended period of time."

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