Bob Kaplan Investment Services Division Bourn Partners LLC

Multifamily development in Tucson, Arizona, has slowed down appreciably in the last 2 years due to a lack of available sites, a weak rental environment and the affordability of single-family housing. According to Bob Kaplan, a broker in the Investment Services Division of Bourn Partners LLC in Tucson, there are approximately 400 apartment units currently under construction, with only 115 new permits pulled in the first 6 months of 2003. During 2001 and 2002, the number of permits issued averaged around 700 units a year.

Of the 3,078 multifamily units completed from 2000 through 2002, about 40 percent were student-specific properties or affordable housing space, with “free-market” units making up the rest. As for square footage, the numbers are probably weighted more toward the former category as these apartments tend to have a larger number of two- and three-bedroom units, says Kaplan.

Job and population growth continue to drive apartment occupancy in Tucson. Prior to the last 2 years, the city maintained steady growth in population and employment, which resulted in the expansion of new apartment properties in the area. While population growth has remained static since 1993, job growth has dipped, falling to 0.1 percent in 2001 and -1.3 percent in 2002.

“While the past 2 years have not shown job growth, the Tucson economy was hit less by the recent recession than many other metropolitan areas,” advises Kaplan, who says the city’s employment growth is projected to rebound by 2.2 percent in 2003.

The apartment development that is taking place can be found mostly on the west and northwest sides of town or in select infill sites. For example, the Phoenix-based developer Scott Homes built its first property northwest of Tucson last year, a 290-unit, Class A property called The Springs at Silverbell. Developers have gravitated to this area because of the availability and affordability of land as well as the demand there. Competing for land with deep-pocketed homebuilders has always proved a difficult task. Kaplan believes southeast Tucson will become the next focus area for multifamily development.

Four types of multifamily projects have been developed in the past 4 years. As the home of the University of Arizona, Tucson’s demand for student housing is a constant. The last two school years saw an apartment shortage though, so much so that the university had to house some students in hotels on a short-term basis. That supply issue no longer exists. Since 1999, more than 1,200 student-specific units have been built in the area, and the university has added more than 200 units of student housing on campus. Three student property developers entered the Tucson market in recent years — First Worthing, JPI Texas Development and SUH Properties.

Another type of rental product, the self-standing, single-story casita, has had an impact on the market in recent years, says Kaplan. One development company, K&S Rental Homes, has built nearly 400 of these units across three locations since 1999. Affordable housing properties have also experienced a significant growth stage as witnessed by the 378 units completed in the past 3 years. Finally, “free-market” properties, including both luxury and moderate-income properties, are in the multifamily mix as well.

Rental rates in Tucson average $560 per unit or 76 cents per square foot. This represents a 0.9 percent increase from the same period last year. Rents range from $319 per month for a 400-square-foot, Class C studio apartment to $1,100 for a 1,200-square-foot, 3-bedroom unit at a Class A property. Effective rental rates are lower due to the frequent concessions offered to attract renters.

“Concessions of 1 month [of free rent] on a 12-month lease and 2 months off on an 18-month contract have been common but appear to be dissipating in what is becoming a healthier rental environment,” says Kaplan.

As of mid-2003, Tucson’s multifamily vacancy rate for apartment communities of 40 or more units was 11.14 percent. “Due to the influences of the University’s 37,000 students and the winter visitor population, the end of the second quarter is always the highest vacancy rate of the year,” says Kaplan. Vacancy rates of approximately 9.5 percent are projected for the end of the third quarter this year.

Kaplan maintains that student-focused rental housing is a property type that is fast becoming overbuilt. From 1999 through 2002, more than 1,160 units and 3,300 bedrooms of free-market, student-specific housing were completed. This will influence growth in the southeast submarket as overall population growth shifts and apartment developers continue to look for available land.

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