Phoenix – September 20, 2016 – The Phoenix multifamily sector continues to mirror many national trends. Namely, rents are rising, vacancy is dropping and everywhere you look it seems another large-scale, luxury apartment community is coming out of the ground.
Now, as rental demand remains steady and investors are actively trading assets at a healthy clip, unique trends are emerging across the Valley’s multifamily sector. One, in particular, is the growing demand for mid-size, Class B and C multifamily properties.
According to CBRE Research , in Q2 2016 there was nearly a 14 percent increase in multifamily property sales volume for communities comprised of 15-100 units year-over-year. Additionally, average rental rates in that property space continue to improve substantially year over year, reporting a 7.9 percent increase in effective rents Valley wide. South Mesa average rents increased 9.29 percent followed by North Tempe with an 8.37 percent increase, respectively.
“Investment activity in mid-size B and C class apartment communities continues to grow, and that is being directly driven by renter demand,” said Brian Smuckler, senior vice president with CBRE’s Phoenix office. “The media tends to focus on the large-scale, luxury product, but there’s a story happening with smaller scale properties that’s really compelling.”
“The improved fundamentals we’re seeing – both terms of dropping vacancy and improved rental rates – are the direct result of pent up investor demand for the limited inventory of value-add opportunities in infill locations that offer renters unique environments that large, institutional assets do not.”
He says this trend has been more prevalent in markets like southern California, Denver and Seattle but has been quietly making headway in the Valley over the last 24 to 36 months.
“It’s a paradigm shift for the multifamily market, and that shift is being led by sophisticated investors,” said Smuckler's partner Senior Vice President Jeff Seaman. “These are folks who recognize the huge opportunities that can come with a little heavy lifting in the form of repositioning assets.”
Smuckler and Seaman, multifamily specialists and co-team leads for the CBRE's Multifamily Investment Properties group in Arizona, point to a few recent transactions as good examples of what this looks like in action.
The Hampton on Osborn, an 18-unit property, was purchased by The Jara Family Trust in late June. The seller Clear Sky Uptown III, LLC sold the property for $1.95 million after repositioning the project. Clear Sky initially purchased the property in 2015 which had been owned by the previuos owners for over 20 years, but after significant renovations and interior unit upgrades with premium contemporary finishes including modern cabinetry and countertops, stainless steel appliances, polished concrete floors and new windows new ownership was able to double the rental rates.
Camelback Vista, a 26-unit community, also recently sold. The seller, Polamco Group, LLC, is local and had owned the property for more than 20 years. Buyer Clear Sky Capital Partners VI recognized a significant opportunity to reposition the property and acquired it for $2.55 million with plans to fully renovate this Biltmore-area asset. The property was in extremely good condition with some of the largest floor plans in the submarket and benefits from street frontage on 32nd Street.
Finally, Teakwood, a 21-unit property was sold by Classic Commercial Company, LLC for $1.6 million. The buyer, Raskin & Associates, Inc., also has plans to reposition the asset. Smuckler and Seaman received multiple offers from local and out of state developers that wanted to teardown the property and re-develop. The buyer plans on renovating and repositioning the property as they want to keep the look and character of the community the same.
Seaman and Smuckler expect investor demand to continue in this sector in the near term, pointing to historical sales data to mark the trend.
“In 2015 we closed 36 transactions for a sales volume of $75 million, and that was nearly 20 percent of the market of class B and C multifamily sales,” said Smuckler. “Year-to-date, we’ve completed 28 transactions worth more than $64 million and activity shows no signs of slowing.”
Seaman concurs saying as renters continue to flock to boutique repositioned communities; there will continue to be demand for smaller scale development and redevelopment. He also points out the overall benefits to the community at large in the form of more affordable housing options that one might find in a large-scale, class A property.
“This trend of class B and C properties being renovated with A quality finishes is filling the gap between A and C quality assets, particularly in core locations. Savvy investors and developers are able to transform outdated communities, make them new and trendy again and bring multiple levels of value to everyone involved – including the renters and neighborhoods in which they’re located.”
About CBRE Group, Inc.
CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (in terms of 2015 revenue). The Company has more than 70,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 400 offices (excluding affiliates) worldwide. CBRE offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting. Please visit our website at www.cbre.com.
