During the second quarter the Phoenix multifamily sector maintained positive momentum, even as job growth slowed nationwide, and amid stagnating economic conditions as the country awaits the November election results. Vacancy rates were up slightly to 8.56% from 8.48%. Vacancy is forecasted to decline throughout the rest of 2012. With declines in vacancy, rental rates will increase. Projections anticipate average rental rates reaching $787 per month during the duration of 2012. Tight credit conditions continue to induce tenants to pursue apartment housing. Investors will look for value-add in properties where minor capital injections can help them achieve larger turnaround returns.
The second quarter vacancy rates for stabilized apartments rose to 8.56%, a mild uptick in vacancy of .08% from last quarter. Six submarkets saw improvements in vacancy, with levels under 6%. The lowest vacancy rates occurred in East Mesa/Apache Junction (4.74%) and West Chandler (5.24%). The highest vacancy rates were posted in East Central Phoenix (12.18%) and North Tempe (12.17%). Demand for mid – higher class properties stayed strong, as most of the job growth was seen in the construction and transportation sectors.
Absorption fell during the second quarter to 268 units, an 83% drop from the 1582 units absorbed during the previous quarter. The Central Black Canyon submarket experienced the highest net absorption of units, having a positive increase of 264 units being absorbed. North Tempe, on the other hand, had the lowest absorption, returning 179 units to the market. Consistent with the previous quarter trend, space near transportation hubs, highway access, and dense population are experiencing higher occupancy rates.
Construction activity had mild increases with 336 new units under construction. Forecasts point to over 1,650 units under construction or scheduled to be built during the remainder of 2012. One of the larger groups granted a development permit was LG Development Group; they plan to build a 423 unit apartment complex in North Tempe. Another large apartment complex being developed is the Concord Eastridge in Downtown Phoenix. It is a mixed use project estimated to bring an additional 325 – 350 apartment units and 5,000 SF of retail space to that submarket. This project, coupled with the increase in construction on the Phoenix Biomedical Campus should spur higher occupancy rates in the Downtown Phoenix submarket.
Although absorption figures were down, sale activity was boisterous. There were 50 sale transactions of 100+ unit properties this quarter totaling $732,216,528. Average price per square foot was calculated at $81.37, while the average price per unit was $66,348. In the largest sales transaction of the quarter, the 660-unit Haven Luxury Apartments at 1440 E Broadway in Tempe sold for $46.5 million. Price per foot was listed at $92.81 with a per unit price of $70,455.
Rental rates in the multifamily sector remained flat through the second quarter. The average rent per unfurnished unit this quarter was $774, excluding utility costs. West Maricopa, part of the Peoria submarket, recorded the highest gross rent of, $1,097 per unit. The lowest gross rent was observed in the Central Black Canyon submarket, $549 per unit. The Sky Harbor submarket posted the highest increase of 7.72% in average gross rent. This reiterates the increased demand for apartments with easy highway access close to dense city centers. Across all of Metro Phoenix, the apartment sector recorded an average cap rate of 5.5%.
According to NAI Global’s Chief Economist Dr. Peter Linneman:
Multifamily starts (5+ units) hit a low of 53,000 units in December 2010. That number has increased to 217,000 as of April 2012. Despite improving conditions, this level is in sharp contrast to the 20-year and 40-year averages of 395,000 and 429,000 units, respectively. This reflects the confluence of weak recessionary demand (due to doubling up of households), an absence of construction financing, and an 8.8% first quarter 2012 vacancy rate based on Census data.
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