Sales velocity on an upswing to start 2018

Conditions were mixed in the Tucson multifamily market during the first quarter. The local vacancy rate inched higher, but remained within the mid-6 percent range that has been the market norm over the past few years.

Rents continue to push higher, and the year-over-year asking rent increase recorded during the first quarter was the strongest on record. These rising rents and fairly stable vacancy trends are prompting new development after minimal deliveries since the beginning of 2017.

Investment activity picked up to start 2018, with the number of properties changing hands more than doubling the total from the fourth quarter of last year. This marked the most active first quarter in more than a decade in Tucson, with the bulk of the transactions occurring in the $1 million to $5 million range.

These types of transactions come with some interest rate sensitivity, and cap rates inched higher during the first quarter, following the trend in the 10- year Treasury bond. The average cap rate in transactions during the first quarter was approximately 6.6 percent, 30 basis points higher than the 2017 average.

Key Takeaways:

  • The Tucson multifamily market remained largely steady during the first quarter. Vacancy ticked up a bit, but is flat year over year and rents are recording healthy gains.
  • After a lull during the past year, new construction will gain momentum in the second half of 2018.
  • Vacancy in the Tucson metro area rose 20 basis points during the first quarter, reaching 6.5 percent. The rate has remained between 6.3 percent and 6.8 percent since the beginning of 2016.
  • Asking rents are up 6.1 percent year over year, ending the first quarter at $735 per month. Rents have increased in each of the past 11 quarters.
  • Sales activity in Tucson spiked to start the year, and more properties traded in the first quarter of 2018 than in any first quarter in more than a decade. The median price dipped somewhat and cap rates rose into the mid-6 percent range.

Outlook:

The outlook for the Tucson multifamily market is favorable. Operating conditions have improved in recent years despite only a modest pace of employment growth. In recent years, several large companies such as Comcast, Caterpillar, Raytheon, and ADP have announced expansion plans. These companies are adding thousands of jobs over a few years, and the latest announcement from Amazon to add 1,500 positions only brightens the outlook for the years ahead. The actions of a few large companies will have an outsized impact in a market the size of Tucson. The impact of the 1,500 Amazon jobs alone would result in a metro wide employment increase of 0.4 percent.

The local investment market is heating up. The strengthening local economy, stable occupancies, and above-average rent growth being recorded in the Tucson market are supporting transaction activity. Pricing and cap rates have proven subject to the direction of interest rates. The yield on the 10-year Treasury rose approximately 30 basis points in the first quarter and a similar increase in cap rates was recorded.

Looking ahead, interest rates could again tick higher before the end of the year, which may put some added upward pressure on cap rates, but could also prompt some owners to choose to list properties ahead of anticipated rate hikes.