Rents and sales prices push higher at midyear

The Tucson multifamily market is posting stronger performance than in past years, as renter demand for apartments is picking up as the local economy improves.

Vacancy in Tucson typically rises during the second quarter, as the student population from the University of Arizona returns home after the end of the school year. During the second quarter of this year, the rate once again pushed higher. But the 2018 vacancy rate is low compared to previous mid-year figures. The rate is down 50 basis points from one year ago and nearly 200 basis points lower than the second-quarter average from the past five years.

Trends in the local investment market appeared to mirror conditions in property fundamentals, with sales velocity recording a bit of a summer lull but prices continuing to rise. The median price in sales of apartment properties during the second quarter reached nearly $66,000 per unit, up from $42,000 per unit in the first three months of the year.

Some of the price increase in the second quarter was as a result of the mix of properties changing hands, with more institutional-grade assets trading. Half of the transactions that closed in the second quarter were in excess of $10 million.

Key Takeaways:

  • The Tucson multifamily market had a stronger second quarter than usual in 2018. Vacancy ticked higher, which is a common occurrence during the second quarter. Even with vacancy recording a modest short-term uptick, the rate is lower than one year ago and rents are on the rise.
  • Multifamily vacancy in Tucson has been gradually improving at a fairly steady rate over the past 24 months. The rate ended the second quarter at 6.3 percent, 50 basis points lower than one year ago.
  • Rents are continuing to rise in the Tucson market. Asking rents reached $751 per month in the second quarter, up 5.9 percent from one year ago.
  • Sales of apartments slowed a bit from the first quarter to the second quarter, but activity is still slightly ahead of last year’s pace. The median price rose in the second quarter and cap rates compressed to approximately 5.7 percent. Year to date, cap rates have averaged about 6.2 percent.

Outlook:

The outlook for the Tucson multifamily market continues to strengthen. Vacancy has been in a gradual improvement cycle for the past five years and an additional vacancy decline is forecast for the second half of this year. As vacancy has tightened, owners have been empowered to raise rents. Asking rents rose by nearly 5 percent in 2016 and spiked by 6 percent last year. The forecast for 2018 calls for an increase similar to last year’s rise.

Investment activity in Tucson has been on the rise in recent years, with the market’s improving property fundamentals fueling activity. More properties sold during the first half of 2018 than during any six-month period in Tucson during the past 10 years. This level of activity may prove to be unsustainable in the second half of the year, as some buyers likely acted in advance of forecast interest rate increases scheduled to occur before the end of 2018.