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WESTERN SNAPSHOT, NOVEMBER 2005
Tucson, Arizona, Multifamily Market
Tucson is located in the Santa Cruz River Valley at 2,400 feet elevation and is surrounded by five mountain ranges and the Tohono O'Odham Indian Reservation. Only 14 percent of the land in Pima County is fee or privately owned property with the balance being federal and state lands, National Parks, Indian Reservations and wilderness areas. Integral to Tucson is the University of Arizona, the 10th largest publicly funded research university in the United States with a student enrollment approaching 40,000. The population of metropolitan Tucson is 955,000 and is growing by 20,000+ new residents annually. Tucson's economy produced approximately 10,000 new jobs in the past 12 months.
Tucson's apartment market comprises 98,000 units in complexes of 10-units or more. The vacancy rate at the end of third quarter was 7.3 percent, and the market has absorbed about 1,800 vacant units in the past 12 months.
Low interest rates have fostered a relentless housing market, which for years had challenged apartment market fundamentals. Record sales of new and resale housing has tempered the absorption of vacant multifamily units, fostered rent concessions and stalled rent increases. The average price of a resale home in Tucson is approaching $250,000, which represents a 30 percent gain over third quarter 2004.
The average monthly apartment rent is $576 or $0.78 per square foot per month, which represents an increase of $8 per unit per month over third quarter 2004. Tucson has the lowest rents of any major western apartment market.
Two new paradigms in the Tucson apartment market — a critical shortage of entitled multifamily land and condominium conversions — should give real legs to the lackluster performance of recent years.
For decades Tucson has been a severely cyclical market. Continual overbuilding on a seemingly endless supply of reasonably priced, entitled, multifamily sites have kept Tucson's rents the most affordable in the West. For example, in the mid-1980s developers were producing 5,000 to 8,000 new apartment units per year. In 2004, only 26 new units were built. Certificates of occupancy for 766 new units will be issued this year, and only 374 units are planned for 2006. There is a critical shortage of entitled apartment development sites, and the governmental agencies are very reluctant to entitle more sites for development. The reason for this reduction is two-fold.
Remember, to begin with, only 14 percent of the land in Pima County is fee or private land. With a shortage of large, reasonably priced and well-located, single-family development sites, home builders for years have been buying up all the smaller multifamily-zoned sites available at very aggressive prices.
There are select areas in Tucson that have rents levels sufficient to justify the cost of new construction. There are no vacant development sites in those traditional areas. With this shortage of entitled multifamily sites, overbuilding should be a thing of the past.
Condominium conversions have finally come of age in Tucson. There are currently 24 complexes totaling 4,800 units either in escrow or in the active conversion process. For the first time, the inventory of apartment units in Tucson is shrinking.
Sales for the larger luxury complexes being purchased for conversion are in the price ranges of $110,000 to $130,000 per unit and $100 to $130 per square foot. Cap rates for these transactions are running between 3.5 and 4.5 percent. The individual condominiums are retailing from $140,000 to $250,000 or roughly $200 per square foot.
There have been 11 sales of conventional apartment complexes of 100+ units in 2005 thru mid-August. The average price was $37,000 per unit and $60 per square foot. The average capitalization rate was 6.3 percent.
The long term outlook for the Tucson apartment market is very positive. Tucson's population and job growth are forecasted to continue if not increase. Escalating prices for building materials, energy and land will continue to put upward pressure on housing prices. The shortage of entitled, multifamily development sites will curtail the overbuilding of the past and give the market stability. Condominium conversions will continue to pull apartment units out of the rental pool. Rent concessions will fall. Occupancy will improve. It is only a matter of time until Tucson's beleaguered rental rates will begin to catch up and possibly surpass other Western multifamily markets.
Mike Chapman is vice president and an investment specialist for CB Richard Ellis in Tucson.
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