Multifamily Sector Finds its Mojo Again

Cooke says Tucson’s downtown area is transitioning to a true urban feel with a live, work play environment.

TUCSON, AZ—The Tucson multifamily market strengthened to end last year, due in large part to a local labor market that gained momentum in the second half of the year. Until the third quarter, local employers had been slow to expand payrolls, even as the national economy gained momentum. That pattern changed course beginning in the third quarter and employment growth accelerated in the final three months of the year, according to a report by Colliers International .   Cindy Cooke , senior executive vice president at Colliers International, tells GlobeSt.com: “Several indicators are pointing to a Tucson market recovery which has been much longer in coming than previously anticipated. Job growth is on the upswing, the downtown area is transitioning to a true urban high energy feel with a live, work play environment, and the multifamily supply and demand is now more closely aligned reflecting a downward trend on vacancy. Tucson is one of the few multifamily markets in the country with cap rates over 6% and as high as 7% in some cases and sale prices are so significantly below replacement cost. Tucson offers investors a great opportunity to buy in a recovering market where multifamily investments are priced to capture solid cash flows and provide excellent future value add opportunities.” Indeed, the Tucson multifamily investment market is gaining momentum as property performance improves. Sales velocity increased in four of the past five years, and the number of properties that traded in 2015 reached an eight-year high. One trend that highlights the growing strength of the local market was the sale of new, high-quality assets to institutional and out-of-state investors. Transaction velocity will likely accelerate as the Tucson multifamily market attracts a deeper and more diverse buyer pool. Employment growth in Tucson closed 2015 on an upswing, as 5,600 jobs were created during the fourth quarter. For the year, 8,900 jobs were added, more than doubling the pace of growth recorded in 2014, says the report. Vacancy ended 2015 at 7.8%, 110 basis points lower than one year ago. Vacancy has been declining at a fairly steady pace even as new multifamily units have come online. As the vacancy rate has tightened, rents have trended higher. In 2015, average asking rents rose 3% to $657 per month, Colliers reports. Additional rent increases are expected in 2016. Sales of multifamily buildings slowed in the fourth quarter; but even after accounting for the slight dip in the final three months of the year, the total number of transactions in 2015 surged 43% from 2014 levels. According to Colliers, the median price was approximately $33,100 per unit in 2015, with cap rates averaging 6.7%. The Tucson multifamily market will benefit from both the supply side and the demand side in 2016. Following three straight years of deliveries of more than 1,000 units per year from 2012 to 2014, additions to inventory slowed to a more manageable level in 2015, and a similar level of new construction is forecast for 2016. Renter demand for apartments should strengthen as employers expand payrolls at a more rapid pace than in recent years. These conditions should lead to additional declines in vacancy and an uptick in rents. With property income revenues on the rise and forecasts calling for additional gains in 2016, investors will likely continue to target multifamily assets that can be acquired at lower price points than in surrounding markets and offer competitive cap rates. The rise in development during the past few years will likely continue to support investment activity. Approximately one-third of the projects delivered since 2010 have changed hands through 2015, and new projects should continue to attract investor attention when leased up, Colliers concludes.