By Suzanne Heyn
The slow, steady growth underway in Phoenix’s multifamily real estate market is a departure from the traditional boom/bust ride.
Brad Goff, principal with ARA Real Estate Investment Services, calls it the first solidly healthy market since the 1970s and expects growth to continue through 2016 or 2017.
“The Phoenix market typically snaps back really fast,” says Goff. “But it didn’t this time.”
Goff, through his 22 years in apartment brokerage, has seen many Phoenix market swings. He joined ARA in 2005 when he helped found the company’s Phoenix branch. Today, he partners with David Lord.
“David always jokes, ‘You’re the face of ARA,’” says Goff. “David is really good at the analytical side of the business, and I’m not.”
While Goff schmoozes and develops community connections, Lord focuses on numbers and details.
With the market on the upswing, many people are focused on math. Rents have rebounded 9 percent of the 32 percent they dropped during the downturn, leaving plenty of room for growth and attracting the attention of investors nationwide.
“We’re in the shelter business, and rents are going up and everybody knows it,” says Goff. “All the investors are looking to acquire that future rent growth.”
With 2 percent job growth expected statewide through 2014, according to the Arizona Department of Administration, and net migration resulting in additional residents, those scary times in 2008 and 2009 when calls for financing met silence have ceded to confidence.
“Nothing happened in 2008,” Goff recalls. “The whole market constricted, from top to bottom.” In 2007, 150 transactions closed. By 2008, the market saw 17.
In 2009, 35 transactions closed.
“There was a heartbeat,” says Goff.
That beat strengthened in 2010 when more than 100 units sold. In the third quarter of 2010, the economy passed an important threshold for creating confidence: a net jobs gain since the downturn.
“The first quarter we had rent growth was exactly the same quarter we had net jobs,” says Goff.
The market continued to strengthen in 2011 with 100 transactions and 2012 with 120 transactions. Goff predicts more than 100 transactions will close in 2013 and rent growth will continue through 2016.
During the boom, high prices made purchasing property on the Valley’s outskirts popular. Today, location has emerged as top priority, Goff says. Locally, the most in-demand areas are north and south Scottsdale, east of Highway 51, Tempe, Gilbert, Chandler and parts of Mesa.
Phoenix – a place where recession-era fear of five years ago been replaced with investor confidence – has emerged as a hot spot. Along with California, Dallas, Houston and Denver, Phoenix ranks high among cities demanding attention.
Goff says there’s a “rush to develop” because of current and future rent growth. About 13,000 units are in the development or planning stages. Whether they break ground hinges on whether the market accepts unprecedented rents just emerging on the market. Some new developers are asking for prices ranging from $1.80 to $2 per square foot — “rents that have never been seen in Phoenix,” Goff says.
“If these owners get those rents, there’s going to be much more development,” he adds. Leases signed at those rates will result in more readily available construction financing to build the 13,000 units waiting to see how the market reacts. Developers should have their answer by 2014, he says. The market has rebounded so thoroughly that even condos have gained in popularity. Once the scourge of Phoenix’s market, condos emerged an unlikely star when single-family home prices skyrocketed 35 percent in the past 12 months.
“Now, we have many buyers who added condo conversions to their target list,” says Goff.
In 2009, a Chicago-based group purchased Citi on Camelback for around $60,000 per unit. In 2013, the building sold for $100,000 per unit. Most remarkable, Goff says, was the level of interest. In 2009, “condo was a four-letter word.” By 2013, 15 offers for the property came in.
“We had several groups clamoring to participate, from the debt and equity sides,” he recalls. “All of a sudden, condo was back vogue.”
Another trend is value-added renovations for rental units to command higher rents. During the downturn, most cost-conscious renters could not fathom paying an extra $50 or $75 a month for stainless-steel appliances or upgraded countertops.
“There was a flight to thrift,” Goff says.
With the resurging economy, the upgrades offer renters an accessible way to elevate their living conditions.
“The future of our market is going to be long-term slow growth,” Goff says. “I think this is the first cycle of our marketplace (since the 1970s) where it’s not boom/bust.”
By 2015, Goff predicts inflation — a somewhat welcome development for apartment owners since inflation leads to increased rents. And with rents in Phoenix already trending upwards, multifamily is a good place to be.