1st QTR 2016
KASTEN LONG COMMERCIAL GROUP: The Kasten Long Commercial Group has specialized in apartment brokerage in metro Phoenix since 1998. Our agents have brokered more than 1,000 communities with gross sales in excess of 1 billion dollars.
The company provides weekly updates (by e-mail) on apartment sales. If you are not receiving this info. – just let us know. We also have published our quarterly apartment newsletter for sixteen years – past issues and other market data are available on our web site www.KLCommercialGroup.com. WATCH FOR OUR NEW APARTMENT LISTINGS ON THIS SITE AS WELL!!
The Metro Phoenix Apartment Market (Q1 2016)
In the 1st quarter of 2016, there were a total of 70 individual apartment sales with 10 or more units. Of these, 19 had at least 100 units and 9 included at least one leg of a 1031 exchange. Of the 70 total sales, 30 were “Flips” – properties resold within the past four years (see pages 2 and 3 for details). Most of the Flips were on the smaller size properties. There were also 3 portfolio sales that included 9 properties and 3 broken condo sales. If you would like to receive weekly updates on apartment sales – just let us know.
Items of Possible Concern
In our 2015 Q4 newsletter, we talked about the apartment market in metro Phoenix having more favorable fundamentals than many other parts of the US. While that is true, we don’t want to give anyone the impression that we only see a “blue sky” future. Real estate is cyclic and at some point, we will enter into the “hypersupply” phase. Here are a few things to be aware of: 1. CAP rates are about as low as they can go; 2. tenants are paying a higher percentage of their income and at some point there will be a cap; 3. interest rates will increase – decreasing a buyers cash-on-cash return; and 4. new construction at some point will not be able to be absorbed. While these factors may not create a significant downturn, they are likely to flatten-out the previous rising apartment values.
What’s the Value for Raising Rents?
Here’s a couple examples of how maximizing rents will lead to obtaining the highest value. Regardless of the size of a property, if your property would sell at a 5.0 CAP rate, for every $100 increase in net monthly rental income, your property value would increase $24,000 ($100 x 12 months / 0.05). If your property had 50 units and you increased each unit by $100, the increase in value would be $1,200,000 ($100 x 50 x 12 / 0.05). Obviously this a pretty simple concept, but it emphasizes the significance of your rents, both to a buyer and a buyer’s lender. Because rental rates have been increasing quickly, lenders are often underwriting cash flow using trialing 12 months of expenses BUT then using current rents and projecting income for a year! Lenders will also look to see the most recent rent for each different unit type. So, always try to obtain the highest rent possible.
Suggestions for Raising Rents
A few ideas might include updating paint and landscaping, providing wireless internet, adding security cameras, making the common areas more secure with walls or fencing, or possibly increasing lighting in parking areas for more security. These items show you care about improving your tenant’s home–items they should be willing to pay a bit more for in rent. If your units have the ability (space and plumbing) to add washers and dryers in the apartment, this can often generate a $50 to $100/month increase in rent. Another means to increasing rents is to charge tenants for a portion of any owner-paid water/sewer/electric/gas bills (commonly called RUBS, Ration Utility Billing Systems). Almost every large apartment community already uses some form of RUBS. Smaller complexes are quickly catching on.
Know your Market
Since about 2010, rental rates have been increasing across the Valley, and have significantly jumped in recent years. Large properties with professional management are pretty good about watching the market and pushing rents. However, we find that many smaller properties, especially when management has developed a social rapport with their tenants, are happy to obtain a $25/mo bump in rents every year. Often, they do not realize that the market has increased much more. If you need help evaluating your specific rental market, we’re happy to help.
10,000+ Units to be Completed in 2016
We recently switched from RealData to Yardi Systems, Inc. for new construction data. Yardi reports that 9 projects were completed in Q1 with a total of 1,983 units. Just one project was started in Q1. This is 349 unit complex at 16th Street and Highland in central Phoenix. They also project that more than 10,000 units will be completed in 2016. Currently there are 11,697 units under construction with 21,266 planned and 7,395 in the initial stages. All total, there are 40,348 units in the overall pipeline. Call us for more information on any of these projects or for a link to our map showing locations of the new and proposed projects.
Low Vacancy Driving Higher Rents
It’s fairly obvious that low vacancy rates allow owners to increase rents. At present, we do not have sufficient supply to accommodate the demand. Since the end of 2010, both rental rates and occupancy rates have been increasing. Occupancy rates across most of the Valley are about 5% with little sign of increasing in the near future. At some point, however, the new apartment construction will start to create an oversupply. This will be felt mostly with the higher-dollar, class “A” properties. As the supply of apartments increases, vacancy rates will also increase. This will result in a flattening of the rental rates.
This begs the question, when will be start having an over-supply. The general consensus is that we have at least a couple years of continued low vacancy and therefore rising rents. Part of the reasoning is that the new construction is making up for the lack of new apartments between 2010 and 2013 – essentially when there was little money for new construction. Another part of the reasoning is that Maricopa County has a population growth of about 1.4% – that equates to about 56,000/year. If 20% of the housing units in the County are apartments (rough number), then we need space for 11,000+ folks each year. Another factor is that some of the new apartments are of such nice quality, some folks are renting these units as a 2nd home. An easy lock & leave.
2005 – 2011: ASU’s Phx Metro. Housing Study (20+ units)
2012 – 2015: RealData, Inc. (50+ units – stabilized)
2016 Yardi Systems, Inc.