WESTERN SNAPSHOT, JULY 2006

Phoenix Multifamily Market

LaBenz

The Phoenix metro area added more residents and jobs last year in absolute terms than any other metro area in the nation. Coupled with an influx of investor dollars, this contributed to strong demand for all housing types and unheard of appreciation to the tune of 40 percent last year within the single-family market.

With developers scrambling to meet the needs of the area’s entry-level market, the condo conversion wave that swept through San Diego and Las Vegas enveloped the Valley. More than 12,000 apartment units were converted to condos in the past 12 months across the Valley, representing more than 5 percent of the local apartment inventory in buildings of 100+ units. In certain markets such as North and South Scottsdale, this figure reached as high as 20 percent, with Class A inventory in these areas reduced by almost one third.

Apartment operations are improving quickly with the large number of units removed from the rental inventory and the strong job growth. This is occurring amidst diminished housing affordability, which is resulting in rampant housing appreciation. Having reached record high vacancy rates of 10 percent just 2 years ago, the Valley’s average apartment vacancy rate has fallen to just 6.5 percent. Meanwhile, rental rates have grown and concessions have faded. The inflationary single-family housing market and falling apartment vacancy rates are now driving rents to new highs, with a near 6 percent annual gain over the 12 months through March 2006. The Valley’s North Scottsdale area is reporting rent growth of 15 percent, in spite of the fact that much of this area’s more upscale product has been removed by conversions.

The outlook for apartments shows sustained strong performance with vacancies continuing to ease, driving even stronger rent gains. Job growth will likely maintain a healthy pace with strong internal job creation and the Valley continuing to attract firms from outside the state. Thus, apartment demand is expected to remain brisk. While the acquisition of rental properties for conversion has moderated amidst a broader slowdown in the local for-sale residential market, the positive effects in terms of reduced inventory of rental units will continue to be felt through the balance of 2006 (due to the lag that exists between a property’s purchase and final switchover to condominiums).

The remainder of the year will likely see more intense interest in the Class B and C segments as investors seek out repositioning opportunities in the marketplace. With a large amount of type A product removed by converters — particularly in Scottsdale, Ahwatukee and the Camelback Corridor of Phoenix — operations of older buildings are expected to see considerable upside.

Given the emerging scarcity of zoned multifamily land in many Valley cities and soaring land prices, apartment development is largely relegated to more fringe areas of the metro area, while deliveries in total are less than forecasted absorption. Almost 1,200 rental units are planned or under construction along the Interstate 10 corridor in the West Valley. Other West Valley sites targeted by developers include Peoria, Glendale and Surprise, which offer more affordable, available land. Developers in these areas include Trammell Crow Company, Alliance Residential, Foursite Development and Fore Properties. Within the Southeast Valley, almost 1,000 units are being developed by Fairfield Residential and American Properties as part of the Spectrum mixed-use project in Gilbert. Conspicuously absent from the development picture is the city of Scottsdale, despite the attractive rental rates it presents to developers. Large-scale development here is impeded by high land prices, a lack of appropriately zoned, useable plots and a comparatively more profitable condo market.

Multifamily developer preference recently has favored the for-sale condo segment over traditional rental property due to rising land costs and the comparative profitability of the condo market. Condo development is largely being seen in higher density, urban settings. In Tempe, several residential projects are springing up around the city’s downtown and Town Lake areas; the two largest are Hayden Ferry Lakeside and Centerpoint. Within South Scottsdale, work continues on projects such as Main Street and the Scottsdale Waterfront.

Perhaps the epicenter of multifamily development is downtown Phoenix. Countless high-rise towers are planned for construction in the next few years, which will coincide with the Valley’s new light-rail network (scheduled for completion in 2008), the downtown campus of Arizona State University (with an eventual enrollment of 15,000 students) and several other major civic works. The area’s largest multifamily projects underway and planned include 44 Monroe, Summit at Copper Square, Copper Pointe and the mixed apartment/condo Cityscape project.

Even as the condo market continues to expand in the Valley, demand for apartments will be largely unaffected. On average, starting prices within these properties are in the $400,000s, whereas high-end units are breaking the multimillion-dollar mark. Developers expect that the typical condo resident will be part of the Bookend Generation: older business professionals that are not ready to retire and are moving out of their traditional single-family residences or young urbanites wanting to be close to shopping, entertainment and work.

The Valley’s multifamily market quickly rose to national prominence in recent years. The same factors responsible for this evolution — mainly the area’s robust population and job growth — will bolster this market’s top ranking in the years ahead. 

Chuck LaBenz is an associate partner in the Phoenix office of Hendricks & Partners.

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