“B” and “C” apartment owners – get ready for lower vacancies, higher rents and increased values.  Nothing happens overnight – but if you don’t pay attention to small changes – you might miss the big picture.  For the past year, we have been reporting an increased number of permits and now construction starts for new apartments.  See our web site and market data for apartments (www.KLcommercialGroup.com).  One of the questions often asked is “what will be the effect of the increased supply on vacancy rates?”  It’s a good question – but it’s not appropriate for the “B” and “C” quality properties.

The new construction is “A” quality and at rental rates far above rates charged for the older properties.  In addition, more than half of the apartments currently under construction are in proximity to the metro light rail system – as they take advantage of connecting the student population from downtown Phoenix, through ASU in Tempe and extending eastward through downtown Mesa, with its five new universities, and eventually farther east to the ASU campus near the Phoenix Mesa-Gateway Airport.

We don’t see much new apartment construction for in-fill locations – and these are high rental-demand areas where jobs are being created.  These areas are often dominated by somewhat older apartment communities, from small to large size, and of “B” and “C” quality.  These units will house the working class and folks that do not choose to pay the high cost for the class “A” apartments.

The Kasten Long Apartment Team stays in regular contact with many apartment owners across the Valley.  The owners of many of the “B” and “C” quality properties in the Valley are now reporting much higher occupancy rates, reduced concessions and have started increasing rents.  With the increased tenant demand, owners have also been able to replace problem and slow-pay tenants with a more stable tenant base.

The only possible chink in the armor might be that in addition to the 3,973 units under construction as the end of the 1st quarter of 2013, there were also an additional 22,282 units in various stages of the planning and permitting process.  As our quarterly newsletter notes, many of these may not be built – but many will.  The dynamics of the metro Phoenix apartment market are changing quickly – with the news media typically a year behind the curve.  For now, owners of “B” and “C” quality apartments should enjoy a good rebound in cash flow and appreciation over the next year or two.

Jim Kasten, CCIM, Designated Broker

Kasten Long Commercial Group