HVS Market Pulse: Tucson, AZ | By Michael Smithson

The Tucson lodging market often lives in the shadow of its bigger sibling, Phoenix. And while meeting and group demand in both markets is driven by Arizona's idyllic weather during the winter and spring, differences in local dynamics paint significantly different pictures in terms of leisure and commercial demand.

Both lodging markets experienced a prolonged recovery following the national recession late last decade, partially attributed to the controversial SB 1070 immigration law; however, the loss of MLB Spring Training in 2011 and the federal government sequestration in 2014 stalled Tucson's recovery even further. Furthermore, Tucson's in-house meeting and group segment is somewhat dependent on the health of Phoenix's resort market, which was affected significantly by the effects of the last recession, as the two markets are often seen as substitutes for one another. Nevertheless, RevPAR in Tucson has been on the rise in recent years, with data illustrating an 8.5% gain in RevPAR for the first quarter of 2018— the strongest first-quarter growth in the state.

While a healthy Phoenix meeting and group market has allowed Tucson hotels and resorts to assert more pricing power than in previous years, the primary driver of growth over the past few years has been economic expansion. In 2016, Raytheon Missile Systems (RMS), Tucson's largest private employer, was awarded a $291-million missile contract from the U.S. Navy. More recently, RMS dedicated a new visitor-access center in May of this year, while two more buildings are currently under construction, and several more are planned to be built by 2020; the expansion is expected to allow RMS to create an additional 2,000 jobs over time. In addition, the $426.7-million expansion of the Banner-University Medical Center Tucson, which began construction in 2016, is on schedule for completion in April 2019, while the $98-million Banner Health Center at the UA Cancer Center opened in December 2017. Moreover, Amazon recently selected Tucson for a new, 855,000-square-foot distribution center, and Hexagon Mining announced that it would lease 26,000 square feet on the third and fourth floors at Bourn Companies' new, five-story, 69,000-square-foot, City Park multi-use complex in the Central Business District. The building is currently under construction and slated for completion this fall. Furthermore, Caterpillar broke ground on its 200,000-square-foot office facility in January 2018; completion is scheduled for early 2019. Caterpillar's decision to locate its headquarters in Downtown Tucson will bring 600 jobs to the city.

Tucson's economic expansion has resulted in increasing levels of commercial-related travel and lodging demand, which is anticipated to continue. However, Tucson's reliance on government demand, from sources such as the University of Arizona, Davis-Monthan Air Force Base, US Customs and Border Patrol, and the State of Arizona, limits average rate (ADR) growth in the market, which represents a challenge for potential investors. A limited number of nonstop flights from the east coast to Tucson are another challenge. Furthermore, uncertainty surrounding NAFTA remains a major caveat to optimistic views of Tucson's growth. PRI's The World reported that up to 236,000 jobs in Arizona would be at risk if the U.S. were to pull out of the deal.Source: RCA & CoStar
Arizona Transaction DataSource: RCA & CoStar
While Tucson may be overshadowed by Phoenix, the market is making strides in its own right. The city's lack of corporate headquarters has historically been a stumbling block, but the relocation of Caterpillar, as well as the expansion of Raytheon and Amazon, bode well for the market. New supply remains at healthy levels and is not expected to negatively affect performance for the greater market. And although the uncertainty surrounding the current administration's renegotiation of NAFTA remains a concern, the overall outlook for Tucson is optimistic given the numerous positive factors.