New apartment construction continued at a rapid pace in metro Phoenix. At the end of the 4th quarter of 2014, there were 33 apartment communities under construction with a total of 8,554 units. Most of these are in Scottsdale, Phoenix and Tempe. In addition, there were 49 projects (11,563 units) in the rezoning – permitting pipeline. That’s a combined total of 20,117 units that may enter our market over the next few years – with more to come. There were 5,658 units completed in 2014 with about 6,500 new units projected in 2015.
To put this in perspective, over the past four years (2010 to 2013), the average number of units entering the market was 2,018/year. The previous 15 years (1995 to 2009) averaged 6,139/year. The lack of new construction was obviously a driving force for the sharp decline in vacancy rates – currently at a seven-year low at 6.1%. The increased apartment supply is starting to have an effect as the overall vacancy rate for the 100+ communities increased at year end. At present, however, the new projects are leasing more quickly than projected and for higher rents.
The overall quality of most of the new apartments is a significant step-up – and the rental rates reflect this quality. Up-scale builders like Alliance and Optima with underground parking, expanded common areas and many amenities have rates at $2.00/sf – $2.20/sf after adding on extra fees for water and common area. Builders such as Wood Brothers and Mark Taylor have surface parking, but their interiors are getting close to condo-quality. Their rates are in the $1.30/sf to $1.60/sf range – again, including add-on fees. While the amenities may pull some tenants from the nearby class “A” properties and have a negative rental effect, the class “B” and “C” properties may be able to actually increase their rental rates since they will be able to offer larger units and often with block solid (low noise) units at much less cost.
One of the concerns for the projected population boom for Metro Phoenix is that many of the new jobs will not be for high-dollar positions. Again, this would provide a lesser demand for the class “A” properties, but may bode well for the older properties with lesser rents – typical of the “B” and “C” communities. Vacancy rates for the 50-99 unit size properties had a significant drop at year-end, from 6.5% to 5.5%.
The location of the new apartments tends to be along the metro Light Rail route, in dynamic areas of Scottsdale and Tempe, in the expanding cities of Chandler and Gilbert and a number of in-fill locations in Phoenix. What we see happening in many in-fill locations is that a new apartment community will attract upscale coffee shops, more retail, more restaurants, etc. – all adding value to the area – and to the nearby “B’ and “C” properties.
In summary, if you own a “B” or “C” property – you should look forward to a new apartment community being built in your area. Something else you might consider is to reposition your property – make it a bit more upscale – and thus offer a slightly lesser-cost option for the quality-driven tenant. If you are looking for an investment opportunity – look for an older property with good bones – with the idea of gutting and completely repositioning the property. We’re seeing this done in many areas across metro Phoenix.