The Tucson multifamily market closed 2020 on an upswing, sustaining the momentum that was achieved during the third quarter. The local vacancy rate dipped to its lowest level in more than two decades, and rents continued to post healthy gains.
Vacancy fell 120 basis points in 2020, the eighth consecutive year where the rate trended lower. The local vacancy rate dipped 20 basis points during the fourth quarter, falling to 4.3 percent. Local asking rents advanced 2.5 percent in the fourth quarter, ending the year at $889 per month. Multifamily rents in Tucson spiked 7 percent in 2020, one of the country’s most significant increases.
Sales of apartment properties surged during the fourth quarter, capping off a strong year of investment activity. Sales velocity rose approximately 35 percent from 2019 to 2020, with the fourth quarter representing the period of the most transactions. For the full year, prices and cap rates closely tracked levels from 2019. Tucson Multifamily
Market Overview
The Tucson multifamily market thrived in a turbulent year in 2020, with operating conditions largely holding steady in the first half before strengthening during the second half. Vacancies tightened and rents spiked in the third and fourth quarters, despite net job losses for the year. Vacancy has declined in each of the last eight years, reaching the lowest point in more than 20 years. With renter demand elevated, rents rose, advancing 2.5 percent in the fourth quarter and gaining 7 percent for the year.
The multifamily investment market posted strong performance throughout 2020, with activity gaining momentum in the fourth quarter. Total sales volume outpaced last year’s figure, with a greater number of larger deals occurring, particularly at the close of the year. One factor driving the increase in activity at the end of the year was a rise in larger transactions. The bulk of the transactions that closed in the final three months of the year topped $10 million, and 30 percent of the transactions closed at more than $30 million.
Looking Ahead
The strong close to 2020 in the Tucson multifamily market has set the stage for another year of healthy performance in the year ahead. The local vacancy rate is at the lowest point in a generation, despite a fairly active pace of multifamily development in each of the past two years. Additional projects are forecast to come online in 2021, and the vacancy rate is likely to inch higher. Renter demand will likely be strongest in the second half of the year, mirroring a trend that arose in 2020. Rent growth is expected to total approximately 5 percent in 2021, somewhat more modest than the area’s five-year average.The pace of transaction activity in Tucson will likely level off a bit in 2021, particularly in the first few months of the year, following a wave of property sales in recent quarters. Property sales in four of the past five years have outpaced the long-term trend, reflecting the healthy levels of investor demand, strong property fundamentals, and low borrowing costs available in the market. One transformation that has occurred in recent years has been the increase in larger transactions. In prior years, transactions in complexes smaller than 100 units selling for less than $5 million accounted for nearly half of the sales in the market. There could be an increase in these transactions in the first half of the year.