Tag Archives: multi-family market

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Has The Ship Sailed On Multi-family Or Is It Full Steam Ahead?

Since 2010, it’s been difficult to ignore the strong tailwinds behind the multi-family market in Phoenix as thousands of units have traded hands, rapid appreciation has been realized, and now thousands of units are in various stages of construction.

Despite any evidence, many have prematurely predicted or anticipate a softening in the market.

To the contrary. Mounting evidence exists that not only is the Phoenix multi-family market solid, but it should be strong for many years to come. Investor appetite remained strong with recent transactions totaling approximately 3,000 units of Class A properties, including CityScape at Lakeshore (Tempe), Broadstone Ahwatukee Fairways (Phoenix), Dobson Towne Center (Chandler), Brookstone at the Foothills (Phoenix), Tempe Groves (Tempe), Pillar at San Tan (Gilbert), and Coldwater Springs (Avondale)

With prices still more than 20% off of 2007 peak prices, investors anticipate additional appreciation, buoyed by, yet another, 2,000 units currently in escrow including Scottsdale’s Montierra, The Fairways and Villa Pallavicini in Chandler, The Palms on Scottsdale in Tempe and Phoenix’s The Retreat at the Raven.

Investor optimism is well-founded. First, rental rates are well below the highs of early 2008 and occupancy is getting tighter due to lack of supply. According to Dallas-based Axiometrics, Phoenix recently ranked in the top 10 Metros with the highest occupancy.

Second, the job market has become more diversified, not relying on construction jobs to drive the market, but diversifying into high technology and biotech. Lastly, with the housing across the nation improving, households who had planned on moving to Arizona have the opportunity to sell their house in other markets.

We have not yet fully realized the benefits of this population growth, but according to U-Haul’s List of Top Destinations, Phoenix now ranks 14th in the country. Aiding this trend, Phoenix’s home market was recently ranked as the fourth most affordable housing market by Intrest.com.

So strong is investor and tenant demand that an additional 30 projects totaling 6,300 units are currently under construction or have been completed in the past 30 days. An additional six notable projects will be under construction shortly, but the big surge in construction may still not be experienced until 2013.

The frenzy of development activity has been magnified by such highly recognized sites closing toward a completion date; sites such as Optima Sonoran Village at 68th St. and Camelback and Alliance Residential’s Broadstone on Camelback (and 26th St.)

Other high-profile projects already cleared or about to be prepared for construction starts in the next several months include the PB Bell’s Liv Apartments at Scottsdale Quarter and two additional Alliance Residential projects at Lincoln and Scottsdale roads and the 4-acre, high-rise parcel just south of the Scottsdale Fashion Square (Broadstone at Waterfront).

Mark-Taylor is also busy on numerous sites including the Norterra project in North Phoenix and the Fiddlesticks site on Elliot Road in Tempe.

With so much momentum, transaction velocity, pending sales, development of additional inventory and strong area fundamentals; multifamily will continue to lead the commercial real estate market and sail toward the horizon.

Rue Bax is a Senior Vice President at ORION Investment Real Estate and co-founder of The Orion Multifamily Group. Throughout his 10+ year career he has specialized in large apartment transactions and has closed more than 50 marketed and off-market Arizona multi-family properties. He may be reached at rue.bax@orionprop.com.

Multi-Family Market - AZRE Magazine July/August 2011

Multi-Family Market Pumps Life Into The State's CRE Industry

The slowly recovering economy is revitalizing the multi-family market in Arizona, restoring the industry to robust health.

Rents are up, vacancies down, and, unlike most commercial real estate segments, any mid-level or upscale apartment property that hits the market attracts scores of investors hoping to make a deal.

After peaking at an alarming 15% in 2008, apartment unit vacancies in Metro Phoenix slipped to 9.7% at the end of 2010, says Marc Huisken, Cassidy Turley BRE Commercial senior vice president for the Multi Housing Investment Group.

And with no new supply in the pipeline, that trend will continue throughout 2011, regardless of any bumps or bruises to the overall economic recovery, he predicts.

In fact, the Valley’s apartment vacancy rate will dip to 7%, rental rates will soar 4% and another 11,000 units will fill up by year-end, says Brad Goff, Apartment Realty Advisors principal.

“Things are getting very healthy, very fast,” Goff says.

In Tucson, the supply of multi-family units remained low and demand high throughout the recession, according to Tim Prouty, managing director of CB Richard Ellis’ Tucson office.

“We have virtually no Class A rentals available,” Prouty says, a result of almost no construction for 10 years and a lack of in-fill space to build where the demand is strongest.

The rest of the state also escaped the volatility of Phoenix’s multi-family market because demand and supply, especially in areas with significant military or student populations, remained stable before and during the recession, says Arizona Multihousing Association CEO Tom Simplot.

Maricopa County accounts for about 80% of Arizona’s apartment inventory, Simplot says.

Multi-Family Market and Housing Shortage

So what’s driving all the demand that Goff says will lead to a “multi-family housing shortage until 2013” in Arizona?

According to Goff, four major factors are propelling the trend to rent: job growth, net in-migration to the state, decoupling of households and a major shift in the perceived value of home ownership. Virtually all of those factors were initiated or amplified by the recession or the just-starting recovery.

Job growth and in-migration were sluggish but positive in 2010, and are poised to pick up speed, according to Lee McPheters, director of the JP Morgan Chase Economic Outlook Center at ASU’s W. P. Carey School of Business. McPheters estimates the state will boost its population by 665,000 and add 300,000 jobs by 2015.

During the recession, many grown children moved in with parents or vice versa. With more jobs available and investments regaining value, those grown children and parents may be moving out now.

But the most important driver of the multi-housing boom is shifting priorities, fueled by the housing industry collapse.

“Buying a home used to be perceived as a vehicle for accumulating wealth, now young people see it as a vehicle for problems,” Goff says.

ST Residential CEO Wade Hundley agrees and says the trend to rent is a national phenomenon.

“It’s harder to get a loan to buy (a home),” he says. “But also, the younger generation is wondering ‘If real estate is where I want to invest.’ They are seeing a lot of people lose their wealth in their home.”

ST Residential, a Chicago-based public-private equity consortium, was founded in the middle of the housing collapse in order to rescue a portfolio of multi-housing assets from a failing bank.

That was in 2009, before a flood of would-be investors saw the value of doing the same. With rents rising and demand for rental units escalating, the scenario is enticing to investors willing to snag a bargain now but wait a while for a nearly guaranteed windfall, Goff says.

Since multi-housing is the only commercial real estate sector that can tap Freddie Mac and Fannie Mae funding, and lots more private money has been sitting out the recession on the sidelines, there is ample financing available, Goff says. Investors just waited until the bottom was well-defined to start shopping, he adds. That happened in 2Q 2010, when rents crept up a smidge for the first time in three years.

“Everybody believes in rent growth,” Goff says. “In summer 2010, the lights turned on. Optimism has returned, and right now, buyers want to be active.” Phoenix sales numbers paint the picture. There were

18 transactions of 100+ unit apartment complexes in 2008, 34 in 2009 and 80 in 2010, Huisken says.

Supply Limited

However, rising rents are not yet high enough to justify a flurry of new construction, Huisken says, so supply is limited.

“Investors can still buy properties for significantly below construction costs,” he says. “New properties won’t come out of the ground until (developers) think they can get the higher rents.”

In 2007, average Metro Phoenix apartment rents in properties with 100 or more units peaked at $802, or 96 cents per SF, but slipped to $771 in 2009. Rents have risen to $783, or 93 cents per SF, this year. That scenario has spawned the frenzy of activity among the wannabe buyers for existing properties, especially distressed luxury digs.

“We get 15 to 20 offers on any Class A building,” Goff says.

Among the Class A distressed properties recently changing hands is the partially completed Centerpoint Condominiums in Tempe. The languishing condo project is under construction — with a new name (West 6th Tempe) and a new focus.

“It’s a fantastic project” that lost its lending in the Mortgages Ltd. mess and watched the market collapse while the situation was resolved, says Tyler Anderson, CB Richard Ellis vice chairman. Anderson, who specializes in the sale of multi-family assets, brokered the sale of the Tempe property.

Also picked up for a song by savvy investors was 44 Monroe, a 196-unit luxury condo complex in Downtown Phoenix. ST Residential snagged not only 44 Monroe, but also the 155-unit 3rd Avenue Palms in Phoenix, the 89-unit Safari Drive condos in Scottsdale and 98 more properties nationwide for $2.7B.

To take advantage of the huge demand for apartments, the new owners are now leasing unsold condos at 44 Monroe, Hundley says.

“This allowed us to take advantage of a (condo) market that’s a couple of years away, “ he adds. “We feel better about leasing at today’s rates, and renting allows us to mothball the project for a while.”

Parsing Submarkets

While some of the best bargains have been for the distressed lender-owned properties, the investor demand is pushing valuations up and luring more sellers into the market to pay off loans or balance their portfolios, CBRE’s Anderson says.

“Value has recovered so that core Class A products are selling at replacement cost,” he says. “A seller may not get all (its) equity back, but can at least pay off the loans.” Still, the picture is skewed.

“The Class A and B product market is recovering quickly, with rent increases of 8% to 10%,” Anderson says. “The Class C market is work force housing, and it is showing early signs of recovery.”

The class differences become apparent in analysis of the submarkets. According to Goff, the apartment vacancy rate is an enviable 5.12% in Chandler, but tops out at 24.14% in the central Black Canyon corridor.

Construction Cycle Starting

At least one major player in the national and local multi-housing business thinks the time is ripe to build — if you can get the right deal.

Alliance Residential bought the 4.7 acres housing the long-empty Hard Rock Café and Marco Polo restaurants near 26th Street and Camelback Road in Phoenix for $10.5M, about a third of its mid-2000s value. The company already owns or manages 49,000 apartment units nationwide, 8,000 in the Valley under the Broadstone banner, and plans to build 270 ultra-upscale units in the tony Biltmore location, says Bob Hutt, managing director for Southwest operations.

Construction of Broadstone Camelback (its proposed name) is slated to start in the fall, with the first units opening in 4Q 2012, and the development completed in 2013, he says. Hutt says Alliance was positioned well to take advantage of recession-starved land prices, low construction costs due to the lack of competition, and fearful lenders.

“Clearly we wouldn’t have been able to touch this property if it hadn’t been for the recession,” Hutt says.

And since Alliance emerged from the economic downturn in excellent financial shape, it easily landed construction financing from lenders with ample cash but fear of spending it.

“It’s nice to get in early in the cycle,” Hutt says. “It’s a unique time when rentals are dominant. The opportunities today are very strong, and the outlook very healthy going forward. There is a lot to look forward to in the multi-family sector.”

For more information, visit the following links:

allresco.com
arausa.com
azama.org
cassidyturley.com
cbre.com
stresidential.com

AZRE Magazine July/August 2011

Multi-Family Market - AZRE Magazine July/August 2010

Multi-Family Market: Its Recovery And What It Means

In this article, Allie Bell takes a look at the recovering multi-family market and what it means for Arizona.

Finding something “hot” in today’s commercial real estate industry is difficult, but as the residential market begins to recover, so does Arizona’s multi-family sector.

Multi-Family Market - AZRE Magazine July/August 2010“The Metropolitan Phoenix multi-family market is emerging from a 12-quarter downturn, which produced the lowest occupancy since the days of the Resolution Trust Corporation,” says Tyler Anderson, vice chairman of CB Richard Ellis’ Multi-Family Institutional Group in Phoenix.

According to M/PF Research, a national apartment survey firm, apartment occupancy nationwide declined about 3 percent in 2008, but leveled off in 2009. Annual rent change declined less than 1 percent in 2008, but fell more than 4 percent in 2009. “Rents across the country are anticipated to drop a bit more in 2010,” Anderson says, “but occupancy appears to have turned the corner as new construction tails off .”

Mike Sandahl, senior vice president of CBRE’s Multi-Family Private Client Group in Tucson, says Tucson’s multi-family market still experienced a steep decline in sales in 2009, despite government-sponsored enterprises (GSEs) keeping liquidity in the market.

Only one project over 100 units sold, and it was sold at a trustee sale,” he says. “However, since the beginning of 2010, there has been renewed momentum in the marketplace. Sales volume has picked up, dominated by over-leveraged properties that have gone back to the lender.”

Multi-Family Development

“There is no new multi-family development activity going on and there doesn’t appear to be any on the horizon, which is both bad and good,” says David Dewar, a principal at Trillium Residential.

However, recovery of the multi-family market is imminent, says Ron Brock Sr., who is the president and CEO of Pierce-Eislen, a local apartment research firm.

We currently have eight properties in Phoenix under construction, and they will all finish this year with nothing else in the pipeline,” he says. “However, Phoenix has traditionally had one of the highest-rated development markets in the country for population — and that’s not going to change.” He adds that the multi-family market will begin its recovery in the latter part of this year, and take on substantial momentum over the next two years.

Market fundamentals in Tucson are showing signs of stabilization, Sandahl says. Occupancy has stopped its steady decline and rental rates appear to be following suit.

Construction in Tucson has remained in-check for the past seven years, sparing the multi-family market from the negative effects of overbuilding.

He noted that when it comes to construction in 2010, there are several properties in Metro Tucson potentially breaking ground this summer — a 330-unit community on the East side, a 300-unit property in the Northwest Central submarket, a 120-unit complex on the West side of town, and 168 units in the far Northwest.

“Overall, development continues to be very cautious,” says Brad Cribbins, senior vice president of the Southwest-Mountain Region for Alliance Residential. “People are very cautious about how to proceed forward, but we will see a very slow emergence into new development over the next 18 to 36 months.”

Investment Review

“The investment market nationally has picked up,” says Brad Goff, principal of Apartment Realty Advisors. “Our market in Phoenix saw only 17 trades in 2008 with more than 100-units, but in 2009 that doubled to 35. … It seems like the rest of the country is a year behind Phoenix — none of the other marketplaces have taken off like Phoenix has in terms of sales volume.”

Anderson agrees. Compared to other major commercial property sectors, multi-family looks very good at present, he says. One of the advantages in multi-family is that lease terms are relatively short, which means revenue can turn quickly after occupancy bottoms.
“The major challenge facing investors today is increased competition from other investors, who are seeking to take advantage of price levels not seen in Metro Phoenix for years,” Anderson says.

Brock reported that Greater Phoenix hit a floor in prices this past year and is holding up fairly well, which resulted in a lot of investment activity with people buying apartments that were previously waiting on the sidelines.

“It’s a very attractive time for multi-family investment as properties have been discounted substantially in most markets,” he says. “Certain areas like Phoenix, Las Vegas and Florida have some substantial reduction in prices, compared to what they were in 2003 and 2007, when there was also a lot of activity.”

He noted that Metro Tucson has not had the same amount of investment activity as Phoenix, as there has not been a great deal of condominium conversion activity or over development in the area.

Anderson says the Phoenix area also is experiencing some capitalization rate compression, as a result of the wide and deep interest in the area’s multi-family offerings among many investor groups.

“Some of the buildings sold in the last month or so were at sub 6 percent cap rates,” Goff says. “That’s a significant change from the 8, 9 and 10 percent rates we’ve seen previously. … I call it a ‘scarcity premium,’ created by the enormous amounts of demand chasing a limited piece of the market.”

Cribbins says, “Today people are purchasing notes, rather than the assets themselves. Right now, development costs don’t produce the yields owners are after, so the investment market influence is for bank notes versus new builds.”

Multi-Family Market - AZRE Magazine July/August 2010He adds that most investors in the Greater Phoenix marketplace are looking at corridors within the Camelback, Tempe and Scottsdale areas. “The demographics are there, as well as the general basic footprints in terms of a healthy multi-family market, so deals are happening,” he says.

When it comes to the types of property classes investors are targeting, Brock explains that, “Investment is like a thumbprint — each investor has their own view of what they want to pursue.” He adds that most of the activity in the Phoenix market is in the upper-end properties in the Class A and high Class B categories. However, buyers and sellers are having trouble capitulating over price points. As for Class C multifamily properties, Brock says those have been hit the hardest with the employment losses.

Sandahl noted that nationwide — no one product type is preferred, as there is strong investment demand across all asset classes.

Senior Housing - AZRE Magazine November/December 2009

Multi-family Market Sector And Senior Housing

Multi-family market sector and housing for the aging boomer generation

One might think that the suffering single-family housing market would be a good thing for multi-family. Foreclosures create demand for rentals — shouldn’t the multi-family market be booming? Well, it isn’t — at least not at the moment.

Senior Housing - AZRE Magazine November/December 2009In Phoenix and Tucson, multi-family followed single-family trends over the past 10 years. Nationwide, the National Association of Homebuilders reported in August 2009 that while some sectors of the housing industry are showing signs of rebounding, the apartment sector isn’t one of them. Data from NAHB for the second quarter of 2009 show a continued downward movement across all rental sectors.

“The continued contraction in multi-family starts is exacerbated by the ‘shadow market’ of empty foreclosed single-family homes and condos that are being rented at below-market rates by investor-owners,” says NAHB chief economist David Crowe in a press release.

“Lenders see the high apartment vacancy rates and vacant condo inventory, and step away from backing any new production.”

Industry experts in Arizona agree. “One of the big challenges in the multi-family market is that it continues to compete with the single-family market,” says Tyler Anderson, vice chairman of CB Richard Ellis’ Institutional Group. “So many of the homes investors buy are becoming rentals. It’s a great time to be a renter with the deals you can cut, but it’s a tough time for owners.”

For 2009 in the Phoenix area, about 5,100 units are projected to be built. Anderson adds that if it’s not under construction today, “Then it’s not going to happen this year.”

These numbers are a far cry from the mid 1980s, when up to 35,000 units a year were built. Yet the problem now doesn’t stem from an oversupply of multi-family, Anderson explains, but from a glut in supply of single-family homes. Currently, few multi-family properties are seeing any rental growth, other than senior housing. Yet senior housing has felt the pinch too, with one distressed senior housing property in Phoenix and another in bankruptcy in Tucson, says David Rothschild, a CBRE executive vice president and leader of the national senior housing services group.

“Phoenix and Tucson are not unlike other places in the U.S. that have been impacted by the real estate market” Rothschild says. “No. 1, it’s difficult to get financing. No. 2, the lease up of facilities is difficult.”

Many seniors who are interested in multi-family senior housing can’t access the equity in their homes because of the economy, Rothschild says. “It’s difficult for them to sell their homes; 401Ks are moving down — many people are delaying because of the market. And not only does it directly affect the 75 to 80 year olds, but also their children. People are putting off that decision, and Mom and Dad are moving in with the kids.”

Bright Spots

The news isn’t bad for everyone. Opportunities exist to purchase properties for 30% to 50% of peak pricing, Anderson says. “There’s not a lack of money out there to buy these properties. There’s plenty of capital out there — 25 to 30 offers on a sale is not unusual.”
And those deals will probably be around for some time.

“You’re going to see more properties available at these corrected prices. I think the challenge is in the next 12 months for the rental market,” he says. “Operations will continue to struggle. But struggling operations make it a great opportunity to buy today, because the market will not remain this soft forever. When job growth returns, rent rates will return quickly.”

Senior Housing – Waiting for the Boom(ers)

Rothschild predicts that within the next 2 years, things will start to come back for senior housing, because “demographic forces are pushing it.”

In the short term there are problems, Rothschild says, but there is a huge bubble of demand in the next 20 years as baby boomers retire.

Baby boomers are loosely defined as those who were born between 1946 and 1964. U.S. Census data indicates that in 2000, 12.8% of the U.S. population was 65 years of age or older — about 1 in 8 Americans. By the time all of the surviving boomers reach 65, there will be 80 million Americans who are 65 years of age or older. By 2030, the U.S. looks a lot grayer — 1 in 5 Americans will be aged 65 years and older.

“There aren’t enough facilities for this generation,” Rothschild says. “When the bubble breaks, it will be very good for current operations; occupancies will be very strong — it will raise rents dramatically.”

Projects like Classic Residence at Silverstone, a Scottsdale project due to be completed in early 2010, will be in high demand. Silverstone is a joint project of Classic Residence by Hyatt in Chicago and Plaza Companies, located in Peoria. The developers have combined a targeted mix of healthcare levels and individual living spaces to fit the lifestyle of just about any retiree.

Silverstone’s developers used their first project, Classic Residence at Grayhawk in Scottsdale built in 1999, as a pattern for their continuing success. “We’re excited about how it’s being received,” says Sharon Harper, Plaza Companies’ CEO. “We were very innovative 12 years ago when we built Grayhawk, and we are very attentive to how residents’ needs evolve. That’s really been the secret of our success.” Grayhawk currently has a waiting list, and interest is spilling over to Silverstone as well, Harper says.

Currently, Arizona has a robust aging population with more than 180 nursing homes, 1,700 assisted living facilities and more than 500 independent-living communities. By the end of 2009, an additional 2,300 units and 8 senior housing projects will be completed.

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AZRE Magazine November/December 2009