WESTERN SNAPSHOT, APRIL 2007

Scottsdale, Arizona Multifamily Market

Huisken

Scottsdale is recognized worldwide as one of the premier cities to live, work and play. Its temperate climate, beautiful setting, and plethora of recreational and cultural activities has made Scottsdale one of the first choices when someone is looking to move to Arizona. Both full-time and part-time residents typically put Scottsdale at the top of their search list when looking for an address to call home, resulting in a very tight multifamily market. Investors are just as anxious to add a Scottsdale address to their portfolio.

The Scottsdale multifamily market is typically viewed as the north Scottsdale submarket, which includes units north of Indian Bend Road, and south Scottsdale, which runs south to the Tempe border.

Apartments

Since 2000, Scottsdale’s population has grown 8.5 percent, reaching 238,900 at year-end 2006. During this same time period, the number of multifamily apartment units built in Scottsdale grew by only 1.2 percent, from 32,180 to 37,660. The city currently has 61 apartment projects of 100 units or more, however, the last time a new project opened was 2005. There were no new apartment projects built in 2006, and there are no new projects under construction or scheduled to break ground in 2007. For the past 8 years, there have not been more than 250 new units built during any one year, with 1998 being the last year that Scottsdale experienced any sizeable new construction (more than 1,100 new units).

The primary roadblock for building multifamily projects in Scottsdale is land, both the cost and the lack of. During 2006 a buyer at a State Land Department auction paid more than $1 million an acre for a multifamily parcel. This makes it hard for developers to pencil out a profitable new multifamily development in Scottsdale, especially with rising construction costs.

Historically, Scottsdale has had the lowest vacancy rate and the highest rental rates of any metro Phoenix city. The average vacancy rate for apartments in north Scottsdale in 2006 was 7.9 percent. In south Scottsdale, the average vacancy rate in 2006 was 6.49 percent. Both of these submarkets experienced slight increases in their vacancy numbers during the year as several apartment projects that were purchased with the intent of converting to condos were returned to rent rolls. The second quarter of 2007 should see vacancy rates decline as, historically, these three months have proven to be a strong time for leasing. Scottsdale rental rates far exceed any other submarket in the metro Phoenix area. In north Scottsdale, the average rents rose 5.8 percent from 2005 to 2006, ending the year at an average of $1,024 per month for an unfurnished unit. In south Scottsdale, rents rose 9.2 percent over the same 12 months, ending 2006 at $924 per month for the same size unit.

Investors have keyed in on Scottsdale, especially buyers looking for projects to convert to condominiums. During 2005, 18 apartment properties were sold — 13 Class A, four Class B and one Class C. The average per-unit price for a Class A property that year was $139,142. In 2006, the average price per unit jumped to $169,714. Eighteen more properties sold that year — 16 Class A properties and two Class B. During the first 2 months of 2007, three Class A apartment properties sold in Scottsdale, with an average per-unit price of $155,178. It appears all of the current buyers plan to continue operating the properties as apartments.

Condominiums

From 2000 through 2005, investors jumped on the condominium conversion bandwagon in Scottsdale, a trend spurred by the city’s high-priced housing market. While many found success with these transformations, some have struggled and returned units back to apartment status. In north Scottsdale, from 2000 through 2004, eight apartment communities were purchased by investors for condo conversions, removing 2,234 rental units from the market. During 2005 another seven properties with a total of 1,614 rental units were purchased for conversion. However, four properties purchased in previous years reverted back to apartments, returning 1,188 units back to rentals units. In south Scottsdale, from 2000 through 2006, 10 apartment projects were purchased for conversion, removing 1,787 rental units in this submarket. Only one property, comprising 472 units, has since reverted back to apartments. While the condo conversion market began to slow in 2006, Scottsdale saw an increase in new condo development.

In 2005, there were 306 condominium/townhome building permits pulled for north Scottsdale. The number jumped to 382 permits in 2006. Four projects — The Landmark at Kierland, One Scottsdale (formerly Stacked 40’s), Plaza Lofts at Kierland and Barolo Condos — were under construction during 2006. During the fourth quarter, the average sales price for a condo in the submarket was $433,168, and 114 units were sold. In south Scottsdale there were 19 condominium/townhome building permits in 2005, but in 2006 this submarket exploded with 260 building permits pulled. The redevelopment of the areas surrounding Camelback and Scottsdale roads, including the city’s waterfront, Scottsdale Fashion Square, and the Old Town and Fifth Avenue areas, featured 19 new condominium and townhome properties. Some of the larger new condo projects include the Scottsdale Waterfront, Optima Camelview Village, Portales Place, and the Residences on First and the Residences on Main. The medium price for condominium sales in south Scottsdale during fourth quarter 2006 was $546,033, and 172 properties were sold during that quarter.

Marc Huisken is a senior vice president in the Multi Housing Investment Group in Phoenix’s Grubb & Ellis|BRE Commercial office.


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