Tucson MSA Multifamily Q2 2019: Where’s the KA-BOOM?


By Roland Murphy, Director of Research at ABI Multifamily

There was supposed to be an earth-shattering Ka-Boom – Where’s the KA-BOOM?

Going into 2019, pundits, prognosticators and trend data purveyors were cautiously hedging their bets and warning everyone to be on the lookout for a fairly boring year. “Like 2018, but more so,” was about as far as most would stick their necks out. But many warned that recessionary horrors lay just beyond the horizon.

For the first most part, they’ve been proven right. There was a little excitement when the Fed started moving on raising interest rates, but the resulting panic in the stock market disco was more extreme than when John Travolta’s polyester suit caught fire. (The movie edit that plays in my head is a lot more interesting than the one you saw on the screen.) As a result, Big Money Dance Off continues.

Here be Dragons
Legend has it that back in the old days of exploration and cartography, mapmakers, when they ran out of known coastlines and features, would throw in a fanciful drawing of a hideous beast, label the region in question with, “Here be Dragons,” and go on about their business.

With the longest recovery in history now clocking in at 120 months-plus, the economic and market analytics punditry are well into uncharted territory these days. As a result, the warnings of impending dragon attack and/or sky collapse are pinging around like happy little neutrons at Chernobyl in April of ’86.

Give them long enough, and they’ve gotta smack into something, right? And since everything has been so good for so long, that’s gotta mean disaster is looming, right?

No. Despite predictions of dragons, leviathan, kraken, various sea serpents and even Cthulhu itself, the multifamily market waters remain enchantingly navigable.

Tucson Market Metrics:
By the Numbers

Rounding the Horn of Q2 and sailing into the Second Half, the Tucson market continues to move ahead on mixed tides.

For 5-49 unit properties, Q2 saw a transaction volume of more than $28 Million, which represented a 17.6% Year-over-Year decrease from Q2 2018. In the 50+ unit category, Q2 brought in just $87 Million, down 64% from 2018.

Average Price-Per-Unit amounts were up healthily in 5-49, rising 11.8% YoY to $72,217, but down 15.8% to $72,963 for 50+. These translated to an Average Price/SF of $105.35 in 5-49 (up 31%) and $103.09 (down 12.23%) in 50+.

Inventory age for 5-49 got newer Year-over-Year, with Average Year Built being 1974, versus 1970 for the same quarter last year. Average Year Built in 50+ was also 1974, compared to 1985 in 2018.

The market’s occupancy rate remained high. Q2 occupancy for 5+ units was 94.7%, an increase of 0.3% Y-o-Y. Average rent was $891, up a solid 7.2% ($60) from Q2 2018.

Tucson MSA demographics continued their solid trends. The Census estimate of total population was 1,026,099. The unemployment rate finished the quarter at 5.0%, according to Bureau of Labor Statistics numbers.

Median Household Income was $48,676, and Per Capita Income came in at $27,323.

In the realm of new construction for 50+ unit properties, no units were delivered in Q2. Only 318 units at two properties were delivered in Q1. An estimated 1,651 units are in the Planning stages across 10 properties. A total of 969 units were listed as Under Construction in seven properties.

Pre-lease absorption rates were low at a rate of just 4 units/property/month.

Total Unit Inventory for 5+ properties was 85,461, and 50+ came in at 66,759.

Portents of DOOM!

Unless you’re Kevin Bacon at the end of “Animal House”, you’re not going to get a lot of attention by saying, “Remain calm. All is well.”

As a result, a couple different things happen. Either pundits obsess about single data points or unusual deviations in order to justify their air time or column space, or outlets take the one cautionary item in a report that’s mostly sunshine, lollipops and rainbows and make that their clarion call.

There are too many examples of the former to count, much less critique, so I’ll use an example of the latter as a case study. A recent dire and eye-catching headline in Multi-Housing News read: “JPMorgan Chase’s Head of CRE: Prepare for a Correction.”

Now, when Al Brooks is warning you to duck and cover, you pay attention. The thing is, though, Brooks’ responses in the Q&A that made up the bulk of the article were almost all pretty low key and upbeat. Asked right off the bat about the biggest challenges facing multifamily, Brooks warned one of the biggest issues at the moment is the increasing need to build a higher number of affordable units in major markets, a common theme that’s been raised for years, including in multiple past editions of this report.

In all the other questions, save one (sorta), Brooks’ comments paint the picture of a healthy market with low vacancy, highly available capital, excellent adoption of new tech to streamline processes and a range of other positives that generally reinforce a justifiably confident outlook for CRE in general and multifamily in particular.

The only even remotely cautionary comment he made was in response to a question concerning what risks lenders need to be aware of given current conditions.

Brooks is quoted as saying: “The multifamily segment continues to see activity in major markets. However, commercial real estate developers and investors should be prepared for a future correction. Although the multifamily segment is benefiting from lower rates and a strong economy, it’s important to maintain a fortress balance sheet for the long term and be ready for anything in a changing and uncertain marketplace.”

That’s it. Don’t put all your eggs in one basket and, remember, anything can happen.

But What About the Fed?!

As much as I don’t like to talk about the Federal Reserve and monetary policy, only because such discussions tend to go down the rabbit hole of quasi-alchemistic arcania moments after the thesis statement is uttered, this time around it warrants a brief mention.

In the second half of 2018 the Fed pulled up its Big Kid underpants and moved to reduce its balance sheets and gently nudge up interest rates. Shortly thereafter, in what looked for all the world like an orchestrated tantrum, the stock market lost its metaphorical mind.

Trying to remove the flailing rugrat from the cereal aisle, where it was causing an embarrassing scene, and get it into the mini-van, Chairman Powell and Company backed off and chose to leave rates at 2.5 percent at the end of the year, even promising a cookie in the form of a new rate cut if the market behaved. Thrilled the bad behavior worked, stocks on major indices broke records and Treasury yields dropped.

One of the harbingers of doom some were forecasting due to the Fed’s earlier assertive policy announcement was that commercial real estate prices were going to get pushed downward. Well, rack up another missed opportunity for correct tea leaf interpretation. Since the Fed was beaten back, CRE remains one of the few investment types to continue generating appreciable returns and cash flow.

Kinda like before, only more so.


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