SOUTHERN CALIFORNIA—As West Coast multifamily investors have been squeezed of yield, they are looking at qualified secondary/tertiary submarkets that can produce the cash flows they are seeking, ABI Multifamily's director of research Thomas Brophy tells GlobeSt.com. Brophy says Tucson is “a viable conduit for Southwest/West Coast-area investors.”

We spoke with Brophy about what makes Tucson a viable conduit market for these investors and other markets that fit the bill.

GlobeSt.com: What makes Tucson a viable conduit market for Southwest/West Coast-area multifamily investors?

Brophy: First let's just talk aggregate numbers. Beginning in 2015, and really accelerating in 2016 through year-to-date, just over 8,000 units in Tucson (out of 23,000-plus total units sold) or 35% have been purchased by California—in particular, Southern California investors. Equally of interest has been the emergence of Pacific Northwest buyers from Oregon and Washington entering the Tucson market with roughly 10% of all units purchased over the same time period.

GlobeSt.com: What do these investors seek that they can more easily find in Tucson?

Brophy: Put simply, cash flow. But let's put this into context. The property archetype of a Tucson apartment community purchased between January 1, 2015 and year-to-date is as follows:

• Garden style apartment community (three stories or less)
• 76 total units
• Built in 1971
• Located in the Central Tucson or Southeast Tucson submarkets
• Average sales price: $4.25 million or $55,893 per unit
• Average monthly rent of $777
• 94% occupancy rate

Based upon the archetype, now let's look at how those values play out in underwriting. (It should be noted well that gross potential rent is based on the parameters above, while expenses are based on the Institute of Real Estate Management's income/expense-report analysis of median per unit/yearly costs of operating an apartment community in the Tucson MSA, as well as internal company analysis. It is meant to be instructive only and does not necessarily represent any one individual case since a financial analysis should be performed using a community's actual operating numbers.)

Gross Potential Rent: $708,624 per year ($59,052 per month)

Loss-to-Lease (3%): $21,258 ($280 per unit)

Gross Scheduled Rent: $687,366

Vacancy/bad debt/other (10%): $68,737

Concessions: None

Effective Gross Income: $618,629

Total operating expenses (salaries/taxes/insurance/water and sewer): $291,764 ($3,839 per unit)

Replacement reserves: $19,000 ($250 per unit per year)

Net operating income: $307,865 / Cap rate: 7.24%

Loan Information

Loan (based on 75% LTV)

Down Payment: $1,062,500

Loan: $3,187,500

Terms: Fixed 10-year (30-year amortization)

Interest Rate: 4.310%

Monthly payment (P&I): $15,792 ($189,504 per year)

Cash-on-Cash return year 1: $118,361 (11.1%)

GlobeSt.com: What other US markets offer alternatives to investors who like the Southwest/West Coast market?

Brophy: As investors have been squeezed of yield, they are looking at qualified secondary and tertiary submarkets that can produce the cash flows reflected in the simplified financial analysis above. Tucson is but one example, albeit a prime example, for this type of yield strategy. It should be noted that this type of strategy can be utilized intra-MSA as well, i.e., targeting undervalued submarkets within a larger metro. In Phoenix, we have seen investors shifting dollars into more western (Glendale/Goodyear) and southeastern (Mesa/Gilbert/Chandler) submarkets with high population and rental growth rates. Conversely, in San Diego, the East County and North County Inland submarkets are experiencing similar interest.

GlobeSt.com: What else should our readers know about the Tucson multifamily investment market?

Brophy: Given Tucson's now five-year low for projected new unit deliveries and with economic and job prospects at, or nearing, seven-year highs lays the foundation for a market not witnessed by Tucson investors in at least a generation, if ever. The confluence of these two conditions will continue to shape the Tucson multifamily market well into the latter half of 2018 since new units will be brought online. Until that time, both occupancy rates and rents, and barring any Black Swan events, should continue to reach all-time highs and make Tucson one of the most-active secondary markets in the county.

SOUTHERN CALIFORNIA—As West Coast multifamily investors have been squeezed of yield, they are looking at qualified secondary/tertiary submarkets that can produce the cash flows they are seeking, ABI Multifamily's director of research Thomas Brophy tells GlobeSt.com. Brophy says Tucson is “a viable conduit for Southwest/West Coast-area investors.”

We spoke with Brophy about what makes Tucson a viable conduit market for these investors and other markets that fit the bill.

GlobeSt.com: What makes Tucson a viable conduit market for Southwest/West Coast-area multifamily investors?

Brophy: First let's just talk aggregate numbers. Beginning in 2015, and really accelerating in 2016 through year-to-date, just over 8,000 units in Tucson (out of 23,000-plus total units sold) or 35% have been purchased by California—in particular, Southern California investors. Equally of interest has been the emergence of Pacific Northwest buyers from Oregon and Washington entering the Tucson market with roughly 10% of all units purchased over the same time period.

GlobeSt.com: What do these investors seek that they can more easily find in Tucson?

Brophy: Put simply, cash flow. But let's put this into context. The property archetype of a Tucson apartment community purchased between January 1, 2015 and year-to-date is as follows:

• Garden style apartment community (three stories or less)
• 76 total units
• Built in 1971
• Located in the Central Tucson or Southeast Tucson submarkets
• Average sales price: $4.25 million or $55,893 per unit
• Average monthly rent of $777
• 94% occupancy rate

Based upon the archetype, now let's look at how those values play out in underwriting. (It should be noted well that gross potential rent is based on the parameters above, while expenses are based on the Institute of Real Estate Management's income/expense-report analysis of median per unit/yearly costs of operating an apartment community in the Tucson MSA, as well as internal company analysis. It is meant to be instructive only and does not necessarily represent any one individual case since a financial analysis should be performed using a community's actual operating numbers.)

Gross Potential Rent: $708,624 per year ($59,052 per month)

Loss-to-Lease (3%): $21,258 ($280 per unit)

Gross Scheduled Rent: $687,366

Vacancy/bad debt/other (10%): $68,737

Concessions: None

Effective Gross Income: $618,629

Total operating expenses (salaries/taxes/insurance/water and sewer): $291,764 ($3,839 per unit)

Replacement reserves: $19,000 ($250 per unit per year)

Net operating income: $307,865 / Cap rate: 7.24%

Loan Information

Loan (based on 75% LTV)

Down Payment: $1,062,500

Loan: $3,187,500

Terms: Fixed 10-year (30-year amortization)

Interest Rate: 4.310%

Monthly payment (P&I): $15,792 ($189,504 per year)

Cash-on-Cash return year 1: $118,361 (11.1%)

GlobeSt.com: What other US markets offer alternatives to investors who like the Southwest/West Coast market?

Brophy: As investors have been squeezed of yield, they are looking at qualified secondary and tertiary submarkets that can produce the cash flows reflected in the simplified financial analysis above. Tucson is but one example, albeit a prime example, for this type of yield strategy. It should be noted that this type of strategy can be utilized intra-MSA as well, i.e., targeting undervalued submarkets within a larger metro. In Phoenix, we have seen investors shifting dollars into more western (Glendale/Goodyear) and southeastern (Mesa/Gilbert/Chandler) submarkets with high population and rental growth rates. Conversely, in San Diego, the East County and North County Inland submarkets are experiencing similar interest.

GlobeSt.com: What else should our readers know about the Tucson multifamily investment market?

Brophy: Given Tucson's now five-year low for projected new unit deliveries and with economic and job prospects at, or nearing, seven-year highs lays the foundation for a market not witnessed by Tucson investors in at least a generation, if ever. The confluence of these two conditions will continue to shape the Tucson multifamily market well into the latter half of 2018 since new units will be brought online. Until that time, both occupancy rates and rents, and barring any Black Swan events, should continue to reach all-time highs and make Tucson one of the most-active secondary markets in the county.