It’s the gamble everyone is talking about — rents topping $2 per square foot, the highest ever seen in Phoenix, in one of the Valley’s newest, most luxurious apartment complexes. Broadstone Camelback, featuring views of the iconic mountain, a two-story fitness center overlooking a pool and a temperature-controlled wine room available to residents, fetches $1,300 for a 628-square-foot, one-bedroom apartment. The prices — and the number of signed leases — are a sure sign the market has reached a simmer. “We weren’t clear when we started whether there was a demand for that, but so far we’ve been pleased,” says Bruce Ward, president of Phoenix-based Alliance Residential, which developed the Broadstone property. “The trouble is these projects, as you know, are very expensive — the land prices are very high. In order to support those kind of costs, these project rents are going to be higher.” Had the market not experienced a downturn, high land prices would have called for condos, not apartments, in deluxe new complexes at hot locations, like the Scottsdale Waterfront — where another Alliance Broadstone property will soon hit the market.
The Camelback land purchase happened at the tail end of 2010. With the market in the doldrums, Alliance pounced on the five acres of prime Biltmore-area real estate and
quickly constructed the deluxe complex at 26th Street and Camelback Road. Earlier this year, the company released the units onto the market at the precise moment a growing job market created a new generation of first-time renters — people moving away from roommates or out of family homes and into their own apartments. Affordable home prices create some competition, but Ward says the most affordable homes line the Valley’s periphery, nowhere close to the restaurants, shops, nightlife and jobs that attract the 20- to 34-year-old multifamily demographic. The recession has definitely ended, he adds. Ward, whose company operates apartment complexes in 19 cities across the country, says most of the large cities have healthy markets.
Even during the recession’s bleakest years, 2009 and 2010, Alliance continued to close deals. The company’s long-time relationships allowed it access to capital for purchasing roughly $500 million worth of properties during the downturn, each of them well below replacement cost. “You had to believe we were going to come out of the recession,” says Ward. “We’ve always been a huge believer in Phoenix. It’s been a wonderful growth market for 25 years…We knew the engine was still there.”
With that engine rumbling again, Alliance has shifted its focus from acquisition to development. The company’s national acquisition investments have dropped to the $200 million to $300 million range. In comparison, development investments now reach $1.2 billion nationwide. In 2012, the company started 5,000 units nationwide, and expects to start 6,000-plus this year. Another 11,000 units wait in the pipeline. Nationwide, the multifamily occupancy rate is 95 percent and rent growth is holding strong just below 4 percent. This year’s permitting will probably slow from the 210,000 permits issued last year, but high absorption rates indicate a healthy supply.
Phoenix will likely issue permits for about 4,000 units this year, which ranks low by historical standards.
“Phoenix has got a lot of running room, we think,” says Ward. “We don’t see an overbuilding situation developing, which is always the red flag that we look for.”
In terms of investment opportunity, Phoenix offers long-term returns similar to other cities. “Obviously the coastal gateway markets are much more expensive to develop and returns are lower,” says Ward. However, values in those areas tend to grow faster over time. When considering those conflicting factors, Phoenix and similar markets such as Denver and Dallas bring returns on par with markets like Los Angeles.
To capitalize on Phoenix’s market, Alliance has in the works two other Broadstone-branded projects: one on the Scottsdale Waterfront and a second at Lincoln Drive and Scottsdale Road. Those two, along with the Camelback property, represent 800 units and a $144 million investment. The Waterfront property will offer another amenity not commonly seen in Phoenix — ground-floor retail. Mixed-use properties have generated discussion in the Valley, but not many complexes feature the urban-living spaces so prevalent in other cities. The Valley’s car-centric culture makes the pedestrian access required for dense areas difficult, but the Waterfront location offered prime opportunity. “In my opinion, it’s good for Phoenix to get infill urban residential close to retail,” says Ward. “It’s going to make it a more livable, walkable city — more green.” Besides ground-floor retail, the Waterfront location is proximate to Scottsdale Fashion Square and the bevy of other restaurants and shops in the area. Updated and luxurious, the living spaces offer good alternatives to owning, saysWard. “These projects — they’re not your father’s Oldsmobile.”