THE BROADER VIEW
The Tucson multifamily market got off to a strong start in 2015. Momentum from the end of last year has carried over into 2015, with vacancy improving, rents ticking higher and healthy levels of net absorption. The vacancy and rent trends are the surest signs of market strengthening. Vacancy is approaching a cyclical low, and with the pace of inventory growth slowing, the rate is forecast to continue to improve. As conditions have tightened and the economy has expanded, operators have begun to implement rent increases. Average asking rents have ticked higher in seven of the past nine quarters, and the rise in the first quarter was the strongest in nearly eight years.
Multifamily vacancy in Tucson dipped to 8.5 percent during the first quarter, an 80 basis point year- over-year improvement and a 40 basis point decline since the end of 2014. Vacancy is trending lower in response to ongoing net absorption, which has been positive in each of the past nine quarters. The primary source for this demand has been employment growth, which has been positive in each of the past four years and began 2015 with a gain of approximately 2,800 workers. Growth has been particularly strong in the education and health services sector, which has expanded by 3.7 percent during the past year with the addition of 2,300 employees.Renter demand in the Tucson metro area has been healthy, and the local vacancy rate has improved despite recent additions to inventory has expanded by more than 5 percent. This year will mark a shift in the development trend, as fewer than 500 units are forecast to come online, limiting the competitive threat from new construction. With the construction pipeline thinning and renter demand still healthy, vacancy is forecast to dip below 8 percent by year end.
Asking rents rose 0.7 percent to $643 per month in the first quarter, and the ongoing vacancy improvements are the driving force behind rent gains. This marked the fastest quarter of rent growth in the Tucson metro area since 2007, and if a similar pace of expansion can be sustained throughout the year, rents will advance in the 2.5- 3.0 percent range in 2015. Rent growth has been strongest in the northern segments of the market, with the Flowing Wells and Catalina Foothills submarkets leading the way with average annual rent gains of approximately 3 percent.
Sales activity dipped slightly to start 2015, falling 14 percent from the pace recorded at the end of 2014. The first quarter is typically a fairly slow period for transactions, and 2015 has gotten off to a stronger-than-usual start. Sales velocity in the first few months of 2015 was nearly double the average first-quarter transaction activity that has occurred over the past five years.
Following a spike of more than 75 percent in 2014, prices cooled in transactions that recorded during the first quarter of this year. The median price in the first three months of 2015 was $22,800 per unit, down from $44,900 per unit in 2014. Prices are being influenced by the mix of assets changing hands. Many of the properties that have sold thus far in 2015 are 1960s- and 1970s-vintage complexes, with smaller units on average. In addition, nearly all of the properties that have sold to date have had vacancies above the market average, providing a drag on pricing. Steady yields showcase the impact the mix of properties is having on prices. Even as prices in the few properties that have changed hands have lagged 2014 levels, cap rates have remained fairly consistent thus far in 2015, averaging in the high-6 percent range.