WESTERN SNAPSHOT, JULY 2005

Phoenix Multifamily Market

Metro Phoenix has long been a favorite among apartment investors for its resilient economy, robust job growth and steady influx of newcomers.

But a recent spike in the price of single-family homes across the Valley has jumpstarted a whole new trend that will be reflected in as many as 6,000 apartment units being converted to for-sale condominiums this year. Compare that with 1,600 conversions in 2004 and just 300 5 years ago.

As in other large cities, including Los Angeles, New York, Chicago, Miami and San Diego, converting apartments to relatively inexpensive condos has helped ease the shortage of affordable housing for hopeful first-time home buyers unable to handle the rising cost of single-family dwellings. A single-family home in north Scottsdale could easily run higher than $500,000, but the median price of a new condominium in the same part of town was $184,485 at the end of 2004, according to the Arizona Real Estate Center at Arizona State University.

By comparison, a two-bedroom apartment in an upscale, Class A multifamily community in the same north Scottsdale neighborhood generally rents for about $940 a month.  That’s a couple hundred dollars higher than the average apartment lease rate in the metro area, which was $713 a month as of the first quarter of this year, with concessions running about 7 percent to 10 percent.  Depending on financing terms, it’s possible for a buyer to have monthly mortgage payments on a condo conversion that are lower than the average north Scottsdale apartment rent.    

Until recently, apartment complexes with fewer than 150 units were popular among converters. Now, thanks to buyers snapping them up as soon as they hit the market, properties with 200 to 300 units are sought after for conversion. Once converted into condominiums, units sell for $150 to $300 per square foot, depending on location and amenities.

According to a recent report by BlackRock Realty (formerly SSR Realty Advisors) on condo activity nationwide, a number of factors beyond housing prices are driving consumer demand for this type of product. They include:

• The maturation of the baby boomers – As the baby boomers approach pre-retirement age, it’s natural for them to consider downsizing, while still maintaining ownership in a property

• The entrance of the echo boomers – Just now entering their adulthoods in substantive numbers (the oldest member of this group is almost 25), many echo boomers are making their first housing choices (i.e., rent vs. own, single-family home vs. condominium)

• Real estate as an investment – From an investment standpoint, real estate has emerged as a favored asset class

• Low interest rates – While housing prices may be rising, interest rates remain relatively low

In Phoenix, the apartment-to-condo conversion trend took off in the first half of 2004, when a red-hot housing market fueled by investors pushed the cost of single-family homes out of reach for many would-be buyers. The Valley already leads the nation for new-home building, but this year it could also be one of the top hot spots for condo conversions, as well.

Much of the action is concentrated in the Scottsdale/northeast Phoenix area, with a flurry of major projects currently under way:

• Venu at Grayhawk (formerly Enclave at Grayhawk), a 388-unit Trillium property built in 2000, selling for $230,000s to mid $400,000s

• Edge at Grayhawk (formerly Lofts at Grayhawk), a 447-unit Trillium property built in 2001, selling for $230,000s to just under $400,000

• Villages at Stonecreek (formerly Pinnacle Stonecreek), a 226-unit complex built in 2000 and acquired by Montecito in December 2004 for $153,540 per unit. Condos are now selling from the $190,000s to low $300,000s. 

• The Venetian (formerly Dos Caminos), a 264-unit property built in 1983 now owned by Equity Residential. Units priced from  $120,000 to $250,000 recently sold out.

• Tuscany Villas (formerly Gateway Villas), a 180-unit complex built in 1995 now owned by Equity Residential. Units priced from $180,000 to $260,000 recently sold out.

• Signature-Scottsdale Horizon, a 268-unit community built in 1995 and acquired by Oculus in August 2004 for $95,149 per unit. Units priced from the $130,000s to the low $200,000s recently sold out.

• Rancho Antigua, a 220-unit complex built in 1983 and acquired by The Continental Group in February for $104,545 per unit. Condos are selling from $190,000 to the low $300,000s.

Texas-based apartment converter Montecito Investments recently purchased four properties in metropolitan Phoenix — Bacaro and Scottsdale Cove are both located in north Scottsdale while the two others, Camelback Square in the Camelback Corridor area and Pinnacle Stonecreek, south of Paradise Valley Mall, are located in Phoenix.  All of these communities are in the process of being converted to condominiums.

If 5,000 to 6,000 units are converted to condominiums this year, as research suggests, new construction by traditional rental providers such as Fairfield Residential, Trillium Residential, Trammell Crow Residential and Gray Development would be completely offset, leading to the first decline in multifamily inventory ever. Occupancy, which almost never exceeds 95 percent because developers generally rush in when numbers rise to that level, could creep even higher within the next few years.

Tyler Anderson, Sean Cunningham and Brad Johnson are members of CB Richard Ellis’ Anderson/Cunningham Multihousing Team in Phoenix.

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