By: Thomas M. Brophy, Director of Research, ABI Mulitfamily

TUCSON, Arizona — The MSA’s total sales volume (10+ unit properties) increased 167%, year-over-year, to $168.95M across 44 transactions representing 2,263 total units sold.  California-based investors continue to be the dominant buyer of multifamily properties in the area accounting for 34% of total units transacted or 772 units, Arizona-based investors came in 2nd with 540 units purchased and, rounding out the top five: (#3) Florida-investors with 455 units purchase, (#4) Massachusetts-based investors with 274 units and (#5) Nevada-based investors with 141 units.

Sales of 100+ unit properties witnessed a sales volume increase of 117%  y-o-y to $95.9M.  Average price-per-unit amount increased 25% to $81,122.  10 to 99 unit properties saw its volume increase an astounding 283% to $72.9M with a surge of 101% in average price-per-unit amounts to $67,578.  Price-per-unit increases in the smaller property size category dovetails the sales trend which began in earnest in late 2016 through 1Q 2017, as mid-century built, extensively repositioned properties in the Central Tucson/University submarket having been coming back online for sale.  In fact, pre-1980’s built product represented 74% of all transactions in the 2Q.

The Tucson MSA did not have any new inventory come online in 2Q.  In fact, Tucson will not see any new construction until the end of 2018, aside from smaller affordable housing developments.  Despite a minor (0.2%) Occupancy Rate contraction to 94.4%, Tucson’s Occupancy Rate is projected to increase to 95% by year end.  Average rent continued is rise increasing 3.8% y-o-y to $794.

Outlook I firmly stick behind my 2017 Market Forecast, despite Fed chatter and three 25-50bps increases behind us, it is unlikely the Fed will continue with its gradual interest rate increase for the balance of 2017 despite many economists predicting otherwise.  Basis for this sentiment is rooted in two primary areas, namely weak inflationary pressures, as stated by Yellen, and continued sub-3% GDP growth post-recession.  This isn’t to say that we are without headwinds; in fact, given government stasis in key legislative areas, specifically healthcare and tax reform, has resulted in loss of the ‘Trump bounce’ yet people remain largely optimistic.  Additionally, despite the projected end to gradual interest rate increases, the Fed has made statements it wants to move towards ‘balance sheet reduction’ or QT, quantitative tightening, which certainly has the potential to sap liquidity from the market.  Internationally there is still significant instability in both EM (Emerging) and DM (Developed) markets, particularly across Europe and Asia.  It’s helpful to remember some 50%+ of the world’s developed markets continue to operate at zero or below interest rates which has led to capital flight.  Despite stocks hitting all-time highs, based in large part on investors factoring in massive deregulation, markets the world over have been prone to ever increasing volatility fits.

With many of the larger western MSA’s reaching, and exceeding, previous peak price per unit amounts has caused investors, on the hunt for higher yield/CAP rates, to look to qualified secondary and tertiary markets.  Tucson with little in the development pipeline, is fast becoming the ‘go-to’ secondary market for multifamily investors.   Given Tucson’s now 5-year low for projected new unit deliveries and with economic and job prospects at, or nearing, 7 year highs lays the foundation for a market not witnessed by Tucson investors in at least a generation, if ever.  The confluence of these two conditions will continue to shape the Tucson multifamily market well into the latter half of 2018 as new units will be brought online.  Until that time both, and barring any Black Swan events, Occupancy Rates and Rents should continue to reach all-time highs and make Tucson one of the more active secondary markets in the country.

For full report click here: ABInsight-Tucson-MSA-2Q-2017-Review-Construction-Glut-to-Intensify-Investor-Demand

By Thomas M. Brophy, Director of Research, ABI Multifamily

PHOENIX, Arizona — Despite delivering 22,952 new apartment units from 2011 to 2016, demand vastly exceeded supply by approximately 7,100 units; if based on 2016/17 population estimates which saw Maricopa rank #1 in the country in population growth, the deficit rises to approximately 12,000 now and 18,000 by 2020.  In fact, if Medium Range Growth Projections are used, a more likely scenario given Maricopa’s status as fastest growing county in the nation, unit delivery deficit will increase to 20,000+ over the time period.  As a result by 2020, the Occupancy Rate for the Phoenix MSA, barring any unexpected increases in current construction levels, is forecasted to reach an all-time high of approximately 96.0%.  Phoenix Market Metrics: By the Numbers The MSA’s total sales volume (10+ unit properties) decreased (29%), year-over-year, to $1.29 billion across 93 transactions representing 10,694 total units sold.  California-based investors continue to be the dominant buyer of multifamily properties in the Valley accounting for 31% of total units transacted or 3,292 units, Arizona-based investors came in 2nd with a little over 2,000 units purchased and, rounding out the top five: (#3) Pacific Northwest-investors with 1,213 units purchase, (#4) Canadian investors with 1,188 units and (#5) Utah-based investors with 659 units.

Sales of 100+ unit properties witnessed the greatest sales volume contraction decreasing (33%) y-o-y to $1.13B.  Despite volume contraction, average price per unit amount increased approximately 14% to $125,058.  Whereas 100+ unit properties saw sales volume decrease, 10 to 99 unit properties saw its volume increase 27% to $153.8M with a surge of 35% in average price-per-unit amounts to $93,297.  Price-per-unit increases in the smaller property size category dovetails the sales trend which began in earnest in late 2016 through 1Q 2017, as mid-century built, extensively repositioned properties having been coming back online for sale.  In fact, pre-1980’s built product represented 84% of all transactions in the 2Q.

The Phoenix MSA experienced a (39%) y-o-y decrease in 2Q 2017 unit deliveries with 1,620 new units delivered to the market.  Nonetheless, Phoenix MSA developers are on track to deliver 7,500+ new units by YE 2017.   Despite elevated unit deliveries occupancy rates for the MSA contracted slightly, (0.6%), to 95% while average rent increased 5.3% to a market record $1,000.  City of Phoenix and Mesa claimed the top spots in the MSA for rent growth at 5.5% respectively, followed by Tempe at 5.4%, Glendale at 4.8% and Scottsdale at 4.4%.  Although Scottsdale saw the lowest average rental rate percentage increase of the MSA, it still claims the top spot in actual average rent which at $1,291 is the highest in the region.

Outlook

I firmly stick behind my 2017 Market Forecast, despite Fed chatter and three 25-50bps increases behind us, it is unlikely the Fed will continue with its gradual interest rate increase for the balance of 2017 despite many economists predicting otherwise.  Basis for this sentiment is rooted in two primary areas, namely weak inflationary pressures, as stated by Yellen, and continued sub-3% GDP growth post-recession.  This isn’t to say that we are without headwinds; in fact, given government stasis in key legislative areas, specifically healthcare and tax reform, has resulted in loss of the ‘Trump bounce’ yet people remain largely optimistic.  Additionally, despite the projected end to gradual interest rate increases, the Fed has made statements it wants to move towards ‘balance sheet reduction’ or QT, quantitative tightening, which certainly has the potential to sap liquidity from the market.  Internationally there is still significant instability in both EM (Emerging) and DM (Developed) markets, particularly across Europe and Asia.  It’s helpful to remember some 50%+ of the world’s developed markets continue to operate at zero or below interest rates which has led to capital flight.  Despite stocks hitting all-time highs, based in large part on investors factoring in massive deregulation, markets the world over have been prone to ever increasing volatility fits.

For more national/international investors, the Phoenix MSA has long been perceived as a more secondary market when compared to the ‘gateway’ markets of Los Angeles, San Francisco, Seattle, New York etc.  Beginning in late 2015, amidst the run-up in prices in more coastal regions, investors turned toward more interior-core markets such as Denver and Phoenix in which to find value and yield.  Given Phoenix’s current business maturation, i.e. from one focused primarily on construction to the Silicon Desert and major financial services/insurance/aerospace/transportation hub, coupled with Maricopa County’s ascension to top spot in population growth, will continue to propel the Phoenix MSA now and into the foreseeable future.

See full Quarterly Report Here.ABI-Multifamily-Phoenix-MSA-2Q-2017-Quarterly-Report

By: Thomas M. Brophy, Director of Research, ABI Multifamily

Once upon a time, there was a little girl named Goldilocks.  She went for a walk in the forest.  Pretty soon, she came upon a house.  She knocked and, when no one answered, she walked right in.

At the table in the kitchen, there were three bowls of porridge.  Goldilocks was hungry.  She tasted the porridge from the first bowl.  “This porridge is too hot!” she exclaimed.

So, she tasted the porridge from the second bowl.  “This porridge is too cold,” she said.

So, she tasted the last bowl of porridge.  “Ahhh, this porridge is just right,” she said happily and she ate it all up.

-The Story of Goldilocks and the Three Bears by Robert Southey

As stated in the year end 2016 report, the Tucson MSA multifamily market, after years of general stagnancy following the Great Recession, saw renewed investor interest starting in 2016.  According to Elliott D. Pollack & Company, Tucson MSA’s jobs were up 0.6% y-o-y and are up 0.5% year-to-date.  Additionally, the type of new jobs being created/announced in the Tucson MSA has continued to evolve.  In fact, Tucson recently made it onto WalletHub’s 2017 Best Places to Find a Job at #102 (of 150).

Notwithstanding Tucson’s sizeable 2,000+ call center job announcements from 2016 through YTD; in 1Q 2017, international mining tech firm, Hexagon, announced its plans to expand and relocate its headquarters to Downtown Tucson joining Caterpillar who announced plans to move there in 2016.  Other major job/economic announcements, and referenced on the map on Page 5 of this report, include: ADP’s plans to add 250 jobs to the area, Ernst & Young will be hiring 125 as it opens a new support center in Downtown Tucson and Tucson-based Vector Space Systems broke ground on a new facility in the Pima County Aerospace Park and debuted ‘the world’s smallest satellite launcher rocket,’ after raising $5M in funding.

Tucson Market Metrics: By the Numbers The MSA’s total sales volume (10+ unit properties) decreased (11%), year-over-year, to $155M.  Although total sales volume decreased, the total number of transactions and units purchased increased, 20% and 33% respectively, to 32 total transactions representing 3,646 units.  Additionally, average year built for all projects purchased witnessed a steep decline of 9 years to 1968.  Considering that both 10 to 99 and 100+ unit properties saw large average year built contractions with steep rises in amount of units purchased would suggest investors are switching to more value add, i.e. renovation, strategies to increase overall project value.    Nearly 32% of all units sold during Q1 were purchased by New York-based Dasmen Residential who acquired Omninet Capital’s 1,166 unit, 4-property portfolio.  California-based investors were #2 with 986 total units purchased, Arizona investors were #3 with 627 units followed by Washington DC and Illinois-based investors with 318 and 199 units purchased respectively.

The 10 to 99 unit properties witnessed the most dramatic percentage increase in sales volume, as well as units transacted, rising 89% y-o-y to $28.7M and 94% to 803 units transacted.  Conversely, 10 to 99 unit properties saw y-o-y sales price per unit amounts contract a nominal (3%) to $35,703 with average age of the property dropping 5 years to 1963.  Although 100+ unit properties saw a significant decrease in total sales volume down (21%) y-o-y to $126.7M, the 100+ unit properties witnessed a 22% increase in total units transacted to 2,843 units with a steep, 16 year, drop in average year built to 1977.

So Little Construction

In regards to new construction, Tucson MSA had 318 new units delivered by the end of the Q1, 90% y-o-y increase.  Despite near term elevated construction delivery schedules, average rent for the MSA increased 5.4% to $796 while experiencing a mild occupancy rate contraction of (0.2%) to 94.1%.  It should be noted that Tucson has a very limited supply of new multifamily projects under construction; Tucson, looking forward, is now at a 5-year low for new units coming online.  In fact, our projections show no new ‘market rate’ units will be delivered (50+ unit properties in size) to the market until the end of 2018.  As such, we’re anticipating both Rent and Occupancy Rates to hit market highs of $806 and 94.5% respectively by the end of the year.

The Road Ahead

As stated in our 2017 Market Forecast, it is unlikely the Fed will continue with its gradual interest rate increase in 2017 despite many economists predicting otherwise.  Basis for this sentiment is rooted in weak preliminary 1Q GDP which at 0.7% growth is the slowest in three years, significant instability in international markets, particularly Europe and Asia, and domestic policy struggles of the new Trump Administration.  Despite stocks hitting all-time highs, based in large part on investors factoring in massive deregulation, markets the world over have been prone to ever increasing volatility fits.  As a result of high market volatility, and both ancillary observed evidence within our client base and Investment Company Institute’s Investment Company Fact Book publication, middle age-to-older market investors have been switching to a combination of passive ETF funds, a now decade-long trend, and purchasing a mix of closed-fund shares and/or direct investments in real estate to provide a more consistent return.  This change in investor sentiment, ceteris paribus, will continue to propel real estate transactions, particularly multifamily, into the foreseeable future.

With many of the larger western MSA’s reaching, and exceeding, previous peak price per unit amounts has caused investors, on the hunt for higher yield/CAP rates, to look to qualified secondary and tertiary markets.  Tucson which saw tremendous economic and job announcement activity through 1Q 2017, and with little in the development pipeline, is fast becoming the ‘go-to’ secondary market for multifamily investors.  Given Tucson’s now 5-year low for projected new unit deliveries and with economic and job prospects at, or nearing, 7 year highs lays the foundation for a market not witnessed by Tucson investors in at least a generation, if ever.  The confluence of these two conditions will continue to shape the Tucson multifamily market well into the latter half of 2018 as new units will be brought online.  Until that time both, and barring any Black Swan events, Occupancy Rates and Rents should continue to reach all-time highs and make Tucson one of the more active secondary markets in the county.

To view the full report go here.

(Source material credits to RED Comps)