Investor interest remains strong in otherwise steady multifamily market
Phoenix, May 31, 2018 – Sales of multifamily developments in Tucson spiked during first quarter of 2018, marking the strongest first quarter performance in more than a decade, according to Colliers International’s market report. This was the most remarkable shift in the city’s multifamily marketplace during 2018, as other factors remained steady.
The number of multifamily properties sold during the first quarter of 2018 was more than double the total of fourth quarter 2017 sales and up 21 percent from first quarter 2017 levels. The median price for properties sold in first quarter fell 12 percent from the median 2017 price. The market essentially gave back the 12 percent gained from 2016 to 2017.
The bulk of transactions fell in the $1-5 million price range. Transactions in this price range tend to be interest rate sensitive. Cap rates inched higher during first quarter, following the trend in the 10-year Treasury bond. The average cap rate in these first quarter sales was approximately 6.6 percent, or 30 basis points higher than the 2017 average.
Vacancy ticked up slightly during the first three months of the year but is flat year over year. Vacancy rose 20 basis points during first quarter, reaching 6.5 percent. Vacancy in Tucson has floated between 6.3 percent and 6.8 percent since the start of 2016.
Asking rents have risen 6.1 percent year-over-year, ending the first quarter at $735 per month. This marks the 11th consecutive quarter of rent increases for the market. Some of the strongest gains have been recorded in the Class C segment, as vacancy tightened and limited the affordable options in the market.
Above-average gains have been posted in the northwest portion of the metro area. For example, asking rents in the Catalina Foothills submarket have spiked 10 percent to $804 per month, while the Northwest Tucson area has recorded an 8.2 percent annual gain to $838 per month.
Construction of new projects hit a lull last year with fewer than 100 new units coming online during the past 12 months. New construction has gained momentum with approximately 1,100 units currently under construction, 800 of which are scheduled for completion before the end of 2018. The combination of rising rents and stable vacancy has motivated developers to launch new projects in recent past months. However, permitting has dropped during the early months of 2018, signaling a possible slowdown in construction for 2019.
The Tucson multifamily market is expected to retain its favorable conditions. Several companies are combining to add thousands of jobs to the economy over the next few years, which is significant for a city the size of Tucson. The impact of Amazon’s 1,500 jobs will result in a metro-wide employment increase of 0.4 percent. The strengthening economy, stable occupancy and impressive rent growth support investor activity. Interest rate increases could put pressure on cap rates, but that shift also may prompt owners to list properties ahead of anticipated rate escalation.
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