For 18 consecutive months leading up to the end of December, vacancy rates have been increasing for industrial space. For the year 2008, the sector’s vacancy rate averaged 6.7 percent. In the fourth quarter alone, it jumped 3 percentage points to more than 11 percent, according to Chuck Blacher, industrial specialist at Tucson Realty and Trust.

And it looks to go even higher this year.

Increasing vacancy rates might not always be looked upon as good. But Don Ahee, office operations manager with CB Richard Ellis, says that’s not necessarily so in this case.

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“It’s coming up from an all-time low of 5 percent,” Ahee said. “In industrial, 5 percent is almost the functionable bottom. It gives companies a chance to move around if they need more or less space right now. It’s really not bad.”

Blacher agrees and added that the economy and the rising vacancies favor the industrial tenants.

“There is opportunity for tenants to upgrade to newer space or extend their current leases at more favorable rates,” he said. “Savvy landlords are keeping tenants in place, even if it means accepting a rent that is under market. This is easier for landlords to do if the building was built or purchased several years ago with less debt. Owners of newly built or purchased property have very little margin to play with. Paid for moving expenses, free rent and tenant improvements are not incentives out of the question to lure tenants to properties.”

There is approximately 42 million square feet of industrial space in the area. Of that, 24 million is owner occupied and 18 million is leasable, according to Blacher.

Net absorption for 2008 was positive; however, it only was so after adding the Target Fulfillment Center on Rita Road.

Net absorption for the year was 824,656 square feet, according to the CB Richard Ellis 2008 industrial report. However, the fulfillment center represents 975,000 square feet of positive absorption. Behind that number lays negative absorption in every submarket for 2008. From negative 155,000 square feet at the airport, to negative 70,000 square feet in the northwest.

“The Tucson industrial market is now feeling the full brunt of the decline in manufacturing and sour economic outlook,” Blacher said. “The faltering economy and credit crunch have put a damper on the sale and leasing of industrial buildings throughout the Tucson area.”

During the fourth quarter, there were three sales of industrial-zoned properties of 15,000 square feet or more. There were only six transactions in the first half of the year. Expanding down to 5,000 square feet, there are 94 industrial properties on the market, according to Blacher.

The year registered strong construction numbers for Tucson’s industrial market, according to the CB Richard Ellis report. The area turned in a total of 1.2 million square feet at the end of 2008. The Target center accounted for most of the new space, of the balance, only 137,000 square feet was vacant on completion, indicating some speculative space was built in 2008. The vacant new construction was primarily condo projects and the market for that product has become increasingly tenuous as leasehold occupancy costs hold steady or move lower.

Average asking lease rates turned around at the end of 2008. After several years of increases, topping out in 2007 at $8.53 per square foot, rates were flat at midyear. They finished the year at $8.23 per square foot. Full-service asking rates for flex space were $13.32 per square foot, modified gross rates averaged $7.20 per square foot and net asking rates averaged $9.36 per square foot. Warehouse space averaged $7.68 per square foot, manufacturing $7.88 per square foot and research and development space $11.04 per square foot.

“As we move through the latter part of 2009 landlords and tenants should prepare for the uptick in most markets, positioning themselves for better times ahead,” Blacher said.

Contact reporter Joe Pangburn at jpangburn@azbiz.com or at (520) 295-4259.