Tenge

The Phoenix multifamily market has experienced an increase in vacancy rates over the past several years. This year, however, vacancy should begin to decrease as new apartment construction slows and job growth continues to rise. Construction dropped 28 percent from 2002 to 2003, and is expected to fall 43 percent from 2003 to 2004, with only 2,500 units coming on line, says Jerry Tenge, senior vice president of the multi-housing investment group at Grubb & Ellis.

As a result, the Phoenix metropolitan statistical area registered a 10.37 percent average vacancy rate for stabilized projects as of second quarter 2003. This represents a 0.64 percent increase over first quarter 2003 and a 1 percent increase since the second quarter of 2002. “What we have seen is a reduction of concessions in the marketplace from 2 or 3 months to 1 or 2 months [of free rent],” says Tenge. “So the physical vacancy may not be changing, but the economic vacancy factor is improving and expectations are high for that trend to continue with students returning for the third quarter.” Overall, however, the multifamily market remains unwelcoming to most developers. There are no new developers currently entering the Phoenix market, and Post, Legacy and JPI are leaving the multifamily market. Existing developers include Fairfield, Mark Taylor, Alliance, Spanos and Trammell Crow Company.

While the apartment market is suffering, there is an upswing in condominium development in Phoenix. “[The condo developer] is competing for multifamily zoned sites and is very aggressive,” says Tenge. “Usually the condo developer cannot compete because he cannot develop at the high density of 18 dwelling units per acre. But he has narrowed the gap from 10 to 12 dwelling units per acre to 14 to 15 dwelling units per acre.” Land prices right now range from $3 to $5 per square foot for B grade apartment sites and $30 to $50 per square foot for high-end condo sites. According to Tenge, one reason for the appeal of condos is the fact that Phoenix has become a more transient city. Some developers taking advantage of the market are D.R. Horton, Pulte, Statesman, Monterey Homes and Towne Realty.

The multifamily development occurring in the Phoenix area is primarily located on the peripheral edge of the city. “Phoenix is a city with a center building outward with only two areas of restriction,” says Tenge. “Because of two Indian reservations, development cannot go south of Phoenix or east of Scottsdale.” Of the submarkets surrounding Phoenix, Scottsdale seems to be one of the more lucrative spots. “[Scottsdale] is almost landlocked, which makes its future seem very bright,” says Tenge. He also adds that Tempe and Chandler have good potential because of the number of new jobs that have been created in that area.

The typical apartment development that is being constructed in Phoenix is either a two-story, frame and stucco construction or a three-story building with about 18 units per acre, covered parking and possibly some garages. The average unit size is 850 square feet with a washer and dryer in every unit, says Tenge. Across all apartment types, “rental rates have been flat for 3 years,” says Tenge. In 2001, the average rent for Class A properties was $815; in 2002, it was $815; and in 2003, rent averaged $816, says Tenge. For Class B and C properties, rents were $580 in 2001, $580 in 2002 and $579 in 2003.

However, the multifamily market should begin to improve as Phoenix experiences strong job growth — 40,000 projected jobs for 2003 and 69,000 new jobs for 2004. But the best help for the apartment market is a rising interest rate, according to Tenge. “The increase in interest rates would make the gap between entry-level housing and apartment rental larger, making it more difficult for renters to leave rental housing,” says Tenge. “The best time to buy in Phoenix will be in 2004 when absorption should be better and the slowdown in new developments will be at an all-time low.”

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