Multifamily on the Mend in the Valley of the Sun
PHOENIX—The dearth of multifamily properties on the market, combined with the
large volume of capital chasing deals, have
created a seller’s market here. Bidding
wars have erupted, pushing pricing up
and cap rates down, according to Market
Monitor 360, produced by Marcus &
Millichap Real Estate Investment Services’
local multi-housing investment group.
Consider the recent sale of Biscayne
Bay, a 512-unit property located at 300 E.
Warner Rd. in Gilbert, AZ. This luxury
apartment community received 45 offers
before trading for $43.5 million—$400,000
more than its asking price.
Seattle-based Private Portfolio Group
LLC acquired the 10-year-old property at
a 5.75% cap rate, according to Tyler
Anderson, vice chairman of CB Richard
Ellis. He and Sean Cunningham, also a
vice chairman with CBRE, negotiated the
deal on behalf of the seller, Chicago-based Waterton Residential.
“This deal let the rest of the market
know how much interest investors have in
the Phoenix area,” Anderson says. “This
demonstrates that there is strong buyer
demand for quality assets.”
Seeking Trash and Treasure in SW
The Southwest office market, similar to the national market, is a tale of two extremes.
Buyers either want troubled assets with lots of upside or new, stable class A product
that boasts long-term leases with a single investment-grade credit tenant or multiple
tenants. Most US commercial real estate falls in between these two ends of the spectrum. And once you get off these two narrow fairways of what buyers currently want,
you end up in the ditch where there’s not much buyer interest.
The bulk of the interest is for bi-coastal assets. Markets like Boston, New York, Los
Angeles, San Francisco or Washington, DC feature high barriers to entry and potential
large rent increases when the economy recovers.
Yet there are some areas across the Southwest that are generating interest from investors, such as Phoenix, where property
values have dropped dramatically due to foreclosures and
sharper job layoffs. They’re also interested in cities that are projected to lead
the country in job growth, including
Austin, Dallas/Ft. Worth and Houston. Texas was the last state to
go into the slowdown and appears to be the first to come out in
the recovery, so there have not been as many distressed, empty
asset sales to date.
Most investors are staying in these primary cities rather than venturing into secondary cities due to greater liquidity on their exit strategy. Beacon Investment
Properties, CB Richard Ellis Investors, Cousins Properties, TA Associates and USAA
are all actively looking for empty and opportunistic office investments and acquiring
assets across the Southwest.
Meanwhile, a wide range of buyers are tracking new, stable class A product. They
include pension funds and their advisors, such as AEW, Kennedy Associates and KBS
Realty Advisors; public and private REITs such as Dividend Capital Trust, Hines, HRPT
Property Trust and Wells; and private buyers such as CIM Group.
The office investment sales market will gain momentum as documented evidence of
the economy improving accelerates and buyers become more confident of a real
recovery. Improved pricing and lower cap rates will bring more office product to market to meet the growing investment demand in the latter half of 2010.
The Southwest will continue to garner investor interest from those wanting to
buy stable or empty assets below reproduction costs. Increasing absorption due to
higher job growth and the absence of new development over the next few years
bodes well for the region.
By Rusty Tamlyn
During the first quarter, 13 multifamily
properties changed hands, compared to
only three during the same period last
year, a 333% increase, according to an
analysis by Marcus & Millichap. At the
peak of the market in 2005, Phoenix saw
However, the 13 sales reflected an average price per unit of $43,746 and $51.29
per square foot, compared to $77,018 per
unit and $75.29 per square foot for Q1
’09, a 43.20% decline per unit and 31.88%
decline per square foot.
Yet Biscayne Bay’s sale price indicates
that the acquisitions market is improving and proves that investors think
Phoenix is positioned to recover,
Anderson contends. “They consider the
market’s current revenue slump a temporary situation and believe that higher-end assets, like Biscayne Bay, will offer
the greatest potential for strong occupancy and rental growth in the near
future,” he says.—Jennifer Duell Popovec
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Houston Rents to Lag
Vacancies Until 2011
Source: Marcus & Millichap, Reis
Rusty Tamlyn is senior managing director of Holiday Fenoglio Fowler’s Houston office. He may
be contacted at email@example.com. The views expressed here are the author’s own.
Although apartment vacancy rates in
Houston will rebound in the second half,
rent growth is not expected to resume until
early 2011, according to Marcus & Millichap.
Asking rents will finish 2010 at $737 per
month, and effective rents will drop to $662,
representing annual losses of 1.2% and