The appetite for buying investments remains quite strong, but the number of apartment sales decreased a bit from previous quarters due primarily to a shrinking supply of product. In the 1st quarter, there were 50 regular apartment sales (10+ units) and three broken condo sales. There were no apartment communities sold at a trustee sale and one of the regular sales was via an auction platform. Of the 50 regular sales, half were greater than one million in price, half were “all cash”, 16 were greater than 100 units in size, and 12 (25%) were “flips” (purchased within the past three years and now resold for a profit). Seven of the sales were “bank owned” (REO) but most all were bank-controlled via short sales.
The newer, class “A” properties are selling for strong values, (as low as 5.2% to 5.5% cap rates) and typically have very strong occupancy (95%+). The low cap rates commanded by these properties is driven by the desire of large funds to place significant capital plus the ability to obtain 80% LTV financing with rates in the range of 4.0% to 4.25%. The majority of the “B” and “C” property sales are driven by investors seeking value-added opportunities. There is an increased demand for these properties from investment groups that have been buying homes and have the personnel already in place for repositioning assets. With an ever-shrinking supply of “deals”, the price being paid for distressed assets has steadily been increasing since about the fall of 2010.
As we predicted, the greater Phoenix apartment market is getting stronger quickly. Vacancy rates and rental concessions have decreased, rental rates and values have increased and the investor demand for all quality and size apartments continues to escalate. The overall metro Phoenix economy is still weak, but gaining strength rapidly. Recall that for many years, Arizona was one of the fastest growing states for population in the US. Because Arizona was hit harder than most other States, in addition to the factors that drove this population boom in the past, we now have very affordable housing, a much more friendly business climate, an available work force and a commitment by the legislature to promote business and job creation.
Every employment sector added personnel in the past year creating 45,000 new jobs, half being hired in the 1st quarter of 2012. Tourism, health services and education saw the strongest gains. Metro Phoenix unemployment is down to 7.6% (from a high of 9.9% in fall of 2010) and population is increasing to fill the demand for new jobs. New home construction is finally happening with a 30% increase in single-family permit applications in the past year. Combine this with the overall US economy gaining strength, and the baby boomers that live in the cold climates finally being able to sell their homes and move to warmer climates – the metro Phoenix population is about to explode.
The lack of construction of houses and apartments over the past few years has already started to spark new construction to meet the new demand. Just as Arizona has experienced in the past, construction will mean more jobs – and in turn will create more population and the need for more housing – and thus more jobs! Combine this with banks finally starting to make loans. The “slingshot” recovery is in full gear. While this is great news for apartment owners and buyers seeking investment opportunities, the market will still take many years to recover to values seen from the highs in 2005 – 2008.