Rents post strong gains in 2017 according to Colliers International

The Tucson multifamily market had a very healthy 2017, with vacancy tightening to its lowest level in more than a decade and the pace of rent growth accelerating.

The dip in vacancy was fueled by a consistent pace of net absorption, coupled with a steep decline in the delivery of new units. Looking ahead to 2018, the pace of net absorption should remain fairly consistent, particularly with the local economy gaining momentum.

Development of new rental units is scheduled to bounce off of 2017 lows, but deliveries will lag levels recorded from 2012-2016. These trends should allow for vacancy to inch a bit lower and fuel additional upward growth in rents.

Sales volume of apartments in Tucson slowed during the fourth quarter, following a robust period of activity in the first nine months of the year. Even after accounting for the slowdown in the fourth quarter, transaction activity in 2017 was higher than in any year since 2006, with projects totaling nearly 10,000 units changing hands.

Pricing dipped a bit in the fourth quarter, but the median price advanced by nearly 15 percent from 2016 to 2017. Cap rates are generally trending lower in Tucson, averaging in the low-6 percent range in 2017. With property fundamentals likely to continue to improve, cap rates could compress again in the year ahead.

Key Takeaways:

  • The Tucson multifamily market closed out 2017 with a strong fourth quarter. Vacancy trended lower and rents rose. Some of the strengthening in the market has been supported by a slowdown in new supply growth.
  • Vacancy in the Tucson metro area declined 20 basis points during the fourth quarter, dipping to 6.3 percent. The rate fell 60 basis points for the year, and this was the fifth consecutive year where the rate declined.
  • Rents posted their strongest annual gains in more than a decade. Asking rents rose 6 percent in 2017, ending the year at $729 per month.
     
    Sales of multifamily buildings slowed during the fourth quarter, following a very strong first nine months of the year. The median price for the year was $48,000 per unit, up 14 percent from 2016. Cap rates compressed to an average of 6.3 percent.

Outlook:

The outlook for the Tucson multifamily market is favorable. Conditions have been improving for the past several years, and the momentum in the market is building.

Vacancy has tightened, supporting rent gains that were two-times the region’s long-term average during 2017. While that pace of rent growth is unlikely to repeat in 2018, rents are forecast to rise by more than 4 percent and vacancies are expected to tick lower once again.

The local labor market will be worth monitoring. To this point in the improvement cycle, job growth has been modest, but some prominent local employers are planning healthy expansions, which is anticipated to spark more aggressive hiring in the year ahead.

Investment activity for Tucson multifamily properties surged in 2017, even with a dip in velocity during the fourth quarter. Investors are responding to the area’s healthy operating fundamentals, including a three-year run where rents have increased by nearly $100 per month.

 Investor demand is also being supported by the relative affordability of acquiring assets. Even with prices pushing higher, the bulk of the sales in Tucson still occur at price points under $10 million and fewer than 20 percent of the buildings that changed hands in 2017 topped $100,000 per unit.

Buyers who may have been priced out of more expensive neighboring markets will likely find opportunities in Tucson in the year ahead.