In the 1st quarter of 2013 there were a total of 56 sales (10 units or more) of which four were bank-owned, one bankruptcy and one short sale. Twelve of the 56 sales (21.4%) were “flips” – properties purchased within the past few years and now sold at a profit. Financing was used in 31 of the sales, 19 conventional, 3 seller and 9 private. There also were two Notes purchased in advance of eventual trustee sales and two properties sold to 3rd parties at trustee sales. In addition to these sales there were five bulk multifamily sales that included 86 properties, with 10 properties being located in Arizona. The sellers on these sales were REITs, including Equity Residential (7 properties), BRE Properties (1) and Milestone Apartments (2). Equity Residential also sold five properties on an individual basis in metro Phoenix.
The total 1st quarter sales were less than previous quarter sales. The reasons as we see it: 1) values have risen since the fall of 2010 and now leveled off; 2) the depressed price, distressed-asset opportunities are greatly reduced; and 3) the inventory of reasonably-priced properties has declined substantially. Considering the old adage of “supply and demand”, with the limited supply, we expect prices to continue to edge upward. Moreover, on the demand side, we are starting to see the return of regular and “1031 exchange” buyers from California. From about 2000 to 2007 California buyers drove the local apartment market – and they will again! The only caution on values increasing might be if interest rates rise, the economy stumbles, or the population does not keep pace with the new construction.
Money for financing remains very inexpensive. For the large, quality, stabilized assets, interest rates are less than 4.0% with LTV’s of 75% to 80%. This “cheap” money continues to keep the CAP rates low. The smaller assets with good historical financials are being purchased (or refinanced) typically at 60% to 75% LTV, with interest rates of 5% to 5.5% (25 year am). Call us if you need suggestions for mortgage brokers or lenders.
For the past few years rental growth has been stagnant, but that’s finally changing. With vacancy rates dropping for the past 13 quarters, instead of increasing rents, the large class “A” apartments have been reducing concessions and move-in specials, but now actual rents are starting to increase. For the “B” and “C” apartments rents are also increasing partly due to increased demand and also due to the reduced number of distressed properties being sold at discount prices and subsequently offering lower rents to quickly obtain strong occupancy. Rental growth for the “B” and “C” properties should continue, but the class “A” apartments may have pressure on rents depending on the effect of new construction as new supply enters the marketplace.
The apartment market is improving and we strongly believe that we are on the lower side of the real estate cycle as it continues to rise. We see “B” and “C” class properties doing very well. As Arizona’s economy improves and JOBS are created, these properties will be the mainstay of the rental community, providing affordable housing for the projected strong increase in population. The well located, well-managed, well-maintained properties will see rental rate growth and strong occupancy. This will increase values. Properties offering a solid 6.5% CAP today could easily go to an 8.0% CAP within a short time-frame. As we continue to note in our newsletters, the important thing is to get in the market, properly manage your property, and then reap the financial gains that are coming. Linda, Scott and Jim, our apartment team, have specialized in the metro Phoenix apartment market for many years. We strongly believe that the projection for a population boom is real and that the increased demand for affordable housing will significantly drive rents and values up in the “B’ and “C” class properties.