Apartment sales in the 3rd quarter were similar volume to recent quarters with 61 regular sales (10+ units), three multi-property (portfolio) sales, seven partial condo sales, and six 3rd party trustee sales. Of the 61 regular sales, 37 had new financing, seller or existing lender financing or assumptions of existing loans (often modified). 26 of the regular sales were less than $1.0M, 20 were over $1.0M and 15 were more than $10.0M. All of the trustee sales were less than $1.0M. The portfolio sales had a combined purchase price of $686M.
Six of the past seven quarters have reported a drop in vacancy rates. The 3rd quarter drop of a full point was a strong sign of continued improvement plus the 1.0% increase in rental rates. Portions of central Phoenix and most areas west of I-17 are still struggling with occupancy as well as jobs. Across the Valley, the larger, well-run properties (with amenities) typically report occupancy of 90+%. Properties that are not able to offer a quality product continue to struggle.
Lenders, that have the ability, continue to work with borrowers on temporary loan modifications. Lenders appreciate that they will not receive a strong price if they are forced to foreclose and sell a property as an REO, nor do they want the headache of ownership. Often times, however, depending on how a loan is modified, the loan may be deemed a “troubled asset” to the bank. With banks fearful of being taken over by the FDIC, lenders always need to balance between helping a borrower and their own balance sheet. As we have noted many times before, if you need help, keep your lender informed of your situation. Borrowers also need to maintain the condition of the property and the occupancy as best possible and show the lender what you would do with the extra money if the loan payment was reduced. Even if a lender has modified your loan in the past, be proactive. The lender will always need continued evidence that the borrower is doing everything possible. Keeping accurate and verifiable records is also critical.
Quality properties with consistent and strong financials are selling at much lower cap rates than expected for our market. This is interesting. Because interest rates have remained low, large money funds are struggling to find quality investments with a reasonable return. As a result, many properties are being purchased between a 5% and 6% cap rate. Across the Valley, all types of properties are being pushed up in value due to the increasing numbers of individuals and investment-pooled monies, from the US, Canada and overseas – taking advantage of our low prices.
The future: If you’ve been receiving our weekly local apartment news e-zine, you’ve seen many stories that support our continued economic recovery. The fact that apartment vacancy rates have dropped from 14.2% to less than 10% since 2009, highlights this move to recovery as well. As the recovery gains momentum and jobs return, the need for construction of not just apartments, but all commercial (and residential) needs, should create lots of jobs and slingshot us to a strong and more rapid recovery than expected. Jim Kasten, CCIM, Designated Broker