In the 2nd quarter of 2013 there were a total of 72 sales (10 units or more), a significant increase from the total of 56 in the 1st quarter. Of the 72 sales, 23 were 100+ units and 49 had less than 100 units. All but 7 of the 100+ unit sales were financed, 4 were bank owned and 4 were flips. “Flips” being properties purchased in the past four years and then sold for a profit (see pages 2 & 3 for past sales). Reported CAP rates on the stabilized assets averaged about 5.5%. Equity Residential sold 5 properties with a total of 1,408 units and combined purchase price of $179,595,000. Of the 49 properties sold with less than 100 units, 31 were financed (18 being “all cash”), 2 were bank-owned, 3 were “short sales” and 12 were “flips”. Our Apartment Team provides a weekly e-mail list of all apartment sales – please let us know if you would like to be included.
New Apartment Construction. After a number of years of minimal construction, at the end of Q2 there were 105 projects (25,681) in various stages from “initial rezoning application” to “under construction”. Not all these projects will be built, but many will. The fact that so many major companies are building, reinforces our belief that we are about to see a strong increase in population across metro Phoenix. For the most part, the new projects will be upscale and may be competition for the higher-priced existing communities. This may be one of the reasons that Equity Residential has been selling their entire portfolio of holdings in the Valley.
Strong Upside Possible for “B” and “C” Rental Rate Properties!
Few builders, if any, are building new apartments with rents typical of “B’ and “C” apartments. While the existing class “A” properties may have competition from the new construction, the “B” and “C” properties should enjoy a strong increase in demand. A portion of the increase in population will only be able to afford the “B” and “C” rental range. With no increase in supply – the increased demand should result in stronger occupancy, higher rents, increased cash flow and significant appreciation!
Financing – Interest Rates Up and Down
As expected, the very low interest rates have started to increase, most notably for the larger loans, with a recent full point bump. The Fed’s latest decision to buy fewer bonds will push rates higher. Although rates are still very low, the “sticker shock” caused a brief rethinking of some buyers’ offering price – as the projected cash on cash return dropped slightly as well as the available loan amount. For the smaller loans, however, lenders that were at the 5.5%, amort. 25 years are now being much more competitive with initial rates below 4%, amort. 30 years.
Location – Location – or – maybe not Location
The quick escalation of prices over the past three years has convinced some owners that prices will continue to skyrocket. Aggressively priced properties, however, are not selling as buyers are seeking real economics. Buyers are also being more selective – seeking quality locations – often over projected higher cash flow. The old adage “location location location” will always be true. Having said that, going in a direction opposite the masses may also be something to consider. For example, portions of the west side of Phoenix continue to report high vacancy rates – but these areas may also have less expensive properties. As the overall economy improves, occupancy and cash flow should also improve across the entire Valley – so maybe these areas deserve investor consideration?? While we remain very optimistic for metro Phoenix, we acknowledge that the economic recovery may be slower essure from the new construction may have more impact than anticipated and there are always un-anticipated events that could affect value.
Kasten Long Apartment Team: Scott Trevey, CCIM (480 205 0862), Linda Fritz-Salazar, Assoc. Broker (602 989 9487), Jim Kasten, CCIM (602 677 0655)