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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.