Tucson Multifamily Market Starts the Year Strong

The Tucson multifamily market experienced an upswing in the first quarter of 2017, marked by tightening vacancy and rising rental rates.  To view the full Colliers International report click HERE.

 

Apartment vacancy fell 40 basis points in the first quarter, reaching 6.5 percent.  The strong Tucson market has had below seven-percent vacancy for each of the past five quarters.  The latest drop put the vacancy 30 basis points lower than one year ago and it is the second-lowest vacancy rate recorded in metro Tucson in the past 10 years.  Northern portions of Tucson are experiencing some of the lowest vacancies.  Northwest Tucson, Catalina Foothills and Northeast Tucson submarkets are all in the low to mid-five percent range.  Tucson renters are attracted the highest quality properties, leading vacancy in the Class A segment to 5.2 percent in the first quarter.  The Class A rate is consistently low, topping six percent just twice in the past two years.

 

Rental rates are on the rise and have reached $693 per month in the first quarter.  This marks a 3.6 percent increase in the past year.  Rental rates have risen in each of the past seven quarters.  Rental rate gains were recorded across all property classes with Class A buildings posting the healthiest jump in rents at six percent year over year.

 

Multifamily construction activity was minimal during first quarter.  Only one market-rate project in Northwest Tucson was under construction, which involves 240 units.  No new units were completed during first quarter.  Construction has slowed considerably since the boom of 2012-2016 when nearly 5,000 units were added to the inventory.

 

Sales of multifamily properties accelerated during the first three months of 2017.  Total transaction volume could reach its highest point in more than a decade by the end of this year.  Prices fell slightly, but cap rates compressed as well.  The median price in properties sold during first quarter was $37,700 per unit, compared to the median price of $42,500 in 2016.  This reflects a shift in the age of properties changing hands.  The mix of properties involved in transactions will be the determining factor in pricing as the year unfolds.

 

The outlook for the Tucson multifamily market only gets better.  After a few years of modest new construction, supply-side pressures will ease during 2017.  Demand is forecast to strengthen, especially following recent employment announcements from Raytheon, Caterpillar and ADP.  The leisure and hospitality sector has been posting above-average job growth, adding more than 3,000 jobs in the past year.  Workers in this industry tend to favor rental housing, so those expansions are great news for the multifamily sector.  The Tucson investment market is strengthening as the underlying property performance trend improves.  Vacancy is near an all-time low and rents are trending higher.  The cap rate compression felt recently in surrounding primary and secondary markets could drive investors to markets like Tucson in their quest for better yields.  While the bulk of assets sold in Tucson recently were built in the 1960’s and 1970’s, we will likely see a shift to the sale of newer complexes that have been delivered during this recovery cycle.

 

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