Tight Apartment Supply Keeps Tucson Apartment Market Hot

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The Editors's picture
Tight market keeps Tucson apartment market hot for investors

Higher paying jobs and an influx of multifamily capital from Portland, Denver, Los Angeles, Phoenix and Canada is driving up prices in the Tucson apartment market in Arizona, according to Picor.

Investors, syndication groups, private equity groups and others  are selling their real estate in their respective cities and moving capital to the Tucson apartment market. These groups are attracted to the favorable cap rates and still favorable interest rates.

 About 90% of all apartment investors considering apartment investments in Tucson are from outside of Arizona.

“The Tucson apartment market has been driven by a multitude of factors. The first factor that is driving the apartment market is that higher paying jobs are entering the Tucson economy,” Allen Mendelsberg of  Cushman & Wakefield Picor writes. “Tucson’s job growth remained relatively stagnant the past five years with median household income in the metro area 15.5% below that of the U. S. Several recent, high-profile jobs announcements included hundreds of highly-skilled and highly-compensated positions.

“The second wave of employers contracting with and supporting these primary employers will broaden the opportunities at all levels.

The Tucson apartment market is hot for out-of-state investors

These groups are attracted to the favorable cap rates and still favorable interest rates. About 90% of all apartment investors considering apartment investments in Tucson are from outside of Arizona.

Demand is high and volume is strong, with the value of transactions year to date exceeding 2016’s annual volume ($452M versus $390M) and on pace to exceed all years since 2006. Our listings average seven to ten days on the market. Average cap rates are below 7.0%, again for the first time since 2006.

Lack of inventory driving Tucson apartment market

“That being said, the third factor driving the apartment market is lack of inventory. Tucson only posted 22 transactions for apartment buildings 20 units and above in the previous quarter,” Mendelsberg writes.

“ Although the number of transactions is higher this past quarter than in comparative years, this is still low compared to more primary markets. Inventory is low primarily because apartment owners do not know where to place their proceeds if they were to sell their investment property.

“Many owners have seen appreciation during their tenure of ownership; therefore, capital gains tax is a concern. Many apartment owners believe apartment prices will rise and do not want to trade into high values,” he says in the report.

Summary and outlook

The rental market continues to strengthen quarter after quarter. We are making up for the years of stagnant and minimal rental growth Tucson felt compared to the much quicker acceleration by neighboring markets. Investor interest continues to be at a high with the lack of inventory driving the values of apartments.

We have seen a significant pick-up in available student housing opportunities with many wners/developers looking at exit strategies. We anticipate similar patterns for the rest of 2017 in the Tucson apartment market.

Get the full report here.

About the author:

Allan Mendelsberg is a principal with Cushman & Wakefield | PICOR concentrating in mulitfamily investments. He also helps clients with manufactured housing and NNN investments. He is a member of Southern Arizona's most active multifamily brokerage team. Allan's clients range from small private investors to large REITs. Allan continues to rank as one of Southern Arizona's most active multifamily brokers. He can be reached at amendelsberg@picor.com

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