In the 4th quarter, there were 79 regular apartment sales (10+ units), a significant increase over recent quarters. In addition, there were five portfolio sales of two or more properties. This last quarter saw over half-billion in sales ($509,574,300) with 8,337 total units. There were 29 communities sold with more than 100 units – representing 85% of the total dollar volume. Almost half of these sales had new bank /institution financing. Of the 50 sales with less than 100 units, 26% had new bank financing and 14% had private loans. Interestingly, 14% of all 4th quarter transaction volume occurred in Tempe – which may imply a possible area play for more student housing as ASU increases its enrollment. Of the 79 closings, 15 were in the last week of December. The overall increase in sales plus the rush at year-end was likely due to the anticipated changing tax laws.
Values for the large, class “A” & “B” assets continued to enjoy strong values due to very attractive financing. The 29 larger properties (100+) saw $/sf at an average of $80.70 and the $/unit average was $65,806. The smaller, class “C” asset values have also been climbing as a result of improved occupancy and rent increases. The 4th quarter saw $/sf prices of $55.06 and per unit averages of $43,104. This should continue, and with the promise of traditional financing making a comeback, may increase values over the course of this year.
Strong Increase in Permitting and New Apartment Construction
In addition to the record-breaking permitting numbers for new apartment construction, there have been a number of new apartment projects announced – awaiting permitting – and often times financing. We are watching the permits vs. chatter for apartment construction to see how many of the proposed new properties actually “get off of the ground”. Many, however, have broken ground – especially in Scottsdale, Phoenix, Tempe and the EastValley. The new apartments will put immediate pressure on other class “A” communities, and unless demand keeps up with the additional supply, we will have an increase in vacancy and move-in concessions. It’s not rocket science to appreciate that there will be a trickle-down effect – creating occupancy pressure on “B” and “C” communities as well.
Market Conditions and Positioning: While the multi-family market bottom of 2010 is clearly behind us, the future for apartment values seems brighter. But let’s look where we were and where we are going. 10 years ago market appreciation was driven by loose financing policies and the market appreciation we experienced was almost linear. Investors looked more like speculators as they bought and sold based on appreciation and not cash flow. With the recent stream of funds from Canada and elsewhere into the Phoenix market for “C” apartments we are now very low on inventory. This has resulted in increased demand– meaning a seller could collect a premium were he to sell into the current shortage. However, the current demand should not be misinterpreted as the beginning of another linear appreciation “run-up.” While financing is beginning to return to the market and jobs are slowly returning to the Valley, it may be unrealistic to expect values to outpace that job growth going forward. Cap rate “compression” must (eventually) be replaced with increasing NOI’s for values to continue their upward trend.