KASTEN LONG COMMERCIAL GROUP: The Kasten Long Commercial Group has specialized in apartment brokerage in metro Phoenix since 1998. Our agents have brokered more than 1,000 communities with gross sales in excess of 1 billion dollars. The company provides weekly updates (by e-mail) on apartment sales, commercial news and posts past newsletters and other market data on our web site www.KLCommercialGroup.com.
The Metro Phoenix Apartment Market (Q3 2016)
In the 1st quarter of 2016, there were a total of 70 individual apartment sales with 10 or more units. Of these, 19 had at least 100 units and 9 included at least one leg of a 1031 exchange. Of the 70 total sales, 30 were “Flips” – properties resold within the past four years (see pages 2 and 3 for details). Most of the Flips were on the smaller size properties. There were also 3 portfolio sales that included 9 properties and 3 broken condo sales.
Staggering Rent Growth
The summer of 2016 will be remembered for two main things: staggering rent growth and unprecedented escalation of apartment values. Vacancy rates have been decreasing since the fall of 2010. We’re now at a point that there is a waiting list at most apartments and owners / managers are able to not only select which they want and also push rents up. Over the past four years, rents for all class properties are reported to have gone up about 25%. On some properties, we’ve seen this amount of increase just this year. There’s been a concern about how much tenants would be able to pay. From discussions with tenants, when they are finally able to find an apartment to rent, sometimes after lots of searching, they are also finding a way to pay the higher rent. These are difficult times for tenants with minimal fixed income.
Values UP – Way UP
In the mid-2000’s, we experienced fairly strong value increases, but not to the extent we have seen this year. A very important difference to the previous run-up in values, is that the increase in rents actually is supporting the increase in values. For those that sold last year, never look back on making a profit, but this year’s prices are considerably higher partially due to the higher rents and partly due to buyers paying more of a premium for the ability to raise rents and increase the value. Pages 2 and 3 of this newsletter clearly highlight the values increases. For sellers, it’s still important to obtain the strongest rent roll possible in advance of marketing your property, Banks look to this mostly for lending and buyers still look for the highest loan possible in deciding which property to purchase. Good agents will show prospective buyers where rents could go, pending the overall market and suggestions of what a new owner could do to warrant even higher rents – and value.
Be Aware of the Real Estate Cycle
Hopefully every investor understands that real estate is cyclic. The industry has been cyclic for years and will be in the future. We’ve been on a good upswing for six years. We do believe that Phoenix with its renewed strong population growth is in a better position to buffer a downturn than most other US cities. We also believe our local housing market may be a good indicator of our market. Look for a move from renting to home ownership to foretell a possible increase in apartment vacancy rates. We know that new construction is very strong and at some point should create an oversupply. We’re also sensitive that mortgage interest rates will likely start increasing in December.
The Trump Effect
We feel good (great) at having a businessman in office. We hope a revised immigration policy will be fair and not drive good folks out of the Country. Building a wall along Arizona’s 389 mile southern border would clearly provide many jobs. We’re hopeful that the 1031 Tax Deferred Exchange rules will remain and hopefully the capital gains tax will not be increased.
10,561 Units Under Construction
In addition to the 10,561 units currently under construction, there are 23,060 “planned” and 7,911 units in the early phases. That’s a total of 41,532 units. The bulk of the “under construction” is in Phoenix (3,849), Tempe (2,462), Chandler (1,256) and Mesa (1,024). Year-to-date, there have been 27 Apartment Communities completed with 6,328 units. By year-end, there are an additional 13 projects scheduled for completion with 2,474 units. That would be a total of 8,802 units for 2016. The projection for 2017 is 25 projects completed with 5,900 units, slightly less. Since a low in 2011, when financing and demand dried-up, the number of apartment completions has steadily increased. For a number of reasons, we expect the new construction to level off or even decrease a bit in the future. See our web site for a detailed list of all new construction, including “Current”, “Planned” & “Prospective”.
Low Vacancy Still Driving Higher Rents
If you own apartments in Metro Phoenix, you know that we have about a zero vacancy. The reported vacancy for all types and sizes of stabilized complexes is roughly 5%. In reality, the 5% is just the time to make the vacated unit rent-ready. Of possible significance is that the A and B properties had a slight uptick in vacancy (0.5%). This is not much of a change, but it was the greatest increase in vacancy in a number of years.
With the continued low vacancy across the Valley, rental rates have been increasing – now up 25% over the past four years for all class communities. For the B and C, typical two-bedroom one bath (about 800sf) apartment, we’ve seen rents jump from $650 to $825 this past year. The larger, professionally managed properties often keep pace with the market. Owner managed tend to lag a bit, partly due to relationships developed with their tenants.