In the 3rd quarter, there were 64 regular apartment sales (10+ units) and four broken condo sales, similar volume to recent quarterly sales. Two properties, Orange Arbor (164 u) and Pierson Place (28 u), both located in central Phoenix, reverted back to the beneficiary at trustee sale. There were no 3rd party trustee sale purchases. Of the 64 regular sales, 27 had more than 100 units with a gross sale volume of $531 million. Most of these sales had some type of financing (new, seller, or assumption of restructured debt). There were 37 apartments sold with 10 to 100 units with a gross sale volume of $51 million. Half of these sales were “all cash”.
Strong Increase in Permitting and New Apartment Construction
The number of permits for new construction grows almost daily. Some of the projects are still seeking financing, so may not be built, however, in Scottsdale alone, there are more than 8,000 permits in various stages with three projects being built and several more scheduled to start soon. The reason for the new construction is obviously due to the increasing demand. The effect of the added supply will be dependent on the population growth and movement from homes to apartments. Some owners of larger communities are selling now – taking advantage of the very inexpensive financing available for buyers – and hedging their bets against the possible competition of new product.
Previous Apartment Sales
In general, the apartment sales activity has been divided into two unique property types. The larger, class “A’ and “B” communities, with strong occupancy and financials, have been selling for low cap rates (5% to 6%) due to the very available, inexpensive money (+4%) with LTV’s of 75% to 80%. Buyers of this property type, typically institutional and large investor groups, enjoy the spread between the cap rate and the low interest rate. The upside in income and value is being driven by increased rents. The other unique property type has been the “B” and “C” properties, without strong financials, that were purchased by investors seeking value-added opportunities.
With an ever-shrinking supply of “deals”, the price being paid for distressed assets has steadily increased since the fall of 2010. Much of the distressed multi-family product has now been purchased, repositioned and subsequently rolled back out into the market. About 30% of the apartment sales reflect this scenario. With a decreased inventory of value-add opportunities, many “rehab” investors are now moving on, leaving more stabilized inventory available – and just in time for the ‘return’ of financing – well sort of. . .
Financing – good for class “A” and “B” – but not quite yet for smaller class “C”
For the larger class “A” and “B” assets that have been recently repositioned, Fannie Mae still offers their very attractive financing with minimal trailing financials. Unfortunately, Fannie Mae’s minimum for loans, does not help the smaller, typically “C” apartment owners or buyers. For these properties, lenders are seeking 6 to 18 months of solid financials to support a strong LTV and attractive interest rates. Savvy investors continue to appreciate the future opportunity – “Get it Bought” and wait for the financing to return. For many of the “C” quality apartments, values have gone up. We encourage you to call us to discuss the value of your property. We would be glad to prepare a “Broker Price Opinion” and discuss the pros and cons of selling now.
ASU’s W.P. Carey School of Business reports Arizona to now be number four in job growth in the country. Combine this with shrinking vacancies, increasing rental rates and financing likely to improve in the future – investing in apartments remains very attractive.
Scott Trevey, CCIM (480 205 0862) and Linda Fritz-Salazar, Associate Broker (602 989 9487)