A Tale of Two Cities

When multi-housing analysts, brokers and developers look at two key metropolitan areas of the Southwest—Denver and Phoenix—they’re presented with two very different stories. In short, while Denver is enjoying a strong multifamily market, Phoenix isn’t.In Denver, vacancies are expected to total about 6.2 percent for 2008 overall, and are anticipated to keep falling. Phoenix multifamily vacancies, by contrast, are at about 12 percent, with much higher vacancies in certain severely impacted submarkets. “Denver is continuing to outperform expectations, and Phoenix is underperforming,” reports Clyde Holland, chairman and CEO of Holland Partners, a Vancouver, Wash.-based development company with offices in Denver and Tempe, Ariz. “Denver never became involved in the subprime mortgage situation, and therefore prices never ran down. But Phoenix is underperforming our pro forma by 5 percent. We’re seeing a lot of panic there.” Among new apartment projects in the Denver market are the Clay Street Residences, a $6.5 million project developed by Mary Dean Marshall, with 55 units aimed at the workforce housing market, and Lincoln Terrace, a $13 million affordable housing project encompassing 75 units in seven stories, developed by Lincoln Housing Partners.By far the strongest action is in Denver’s condo developments. Spurring multi-unit construction in downtown Denver is the city’s Downtown Area Plan, approved last year by the Denver City Council, which encourages increasing urban residents in the city core and development to house them. The council anticipates the need for 18,000 additional units to accommodate upward of 25,000 more downtown residents over the next 20 years.”Jobs drive this,” notes Mel Mayers, senior vice president with Sterling American Property Inc., based in New York. “Unemployment in Denver is just 4.7 percent, and they’re expecting 20,000 jobs to be added in 2008. In the last month, I’ve had half-a-dozen deals come from Denver operators.”Marcus & Millichap expects some 2,500 new apartment units to be added to the Denver market in 2008. When factored into the shadow market of unsold single-family homes, multifamily concessions in the Denver market are running at the equivalent of about a month-and-a-half of rent. Among major Denver deals, Red Peak Properties has broken ground on a $65 million expansion project of the Seasons of Cherry Creek, a 439-unit luxury apartment property in Denver’s upscale Cherry Creek neighborhood. Seasons’ existing 15-story tower will be augmented by a 13-story tower as part of the Built Green Colorado pilot program. It will incorporate green standards expected to produce energy efficiency 15 percent better than code.Meanwhile, Marcus & Millichap has arranged the sale of Uptown Broadway, a 116-unit apartment community in nearby Boulder, for $22.85 million, representing $226 per square foot, or $193,983 per unit, a record price for Boulder.”Over the past 12 to 18 months, there has been a marked improvement in the Denver market in occupancy and concessions,” Mayers says.Strong activityAmong the array of new condo developments is Spire, a 41-story condo project at 14th and Champa streets. Spire will include 503 condos with prices starting at $200,000. Sales are expected to start in January. Bancroft Capital is owner of the project, which is developed by The Nichols Partnership. Meanwhile, looking toward a spring 2009 completion is the $165 million Pinnacle at City Park South, with two condo towers of 27 and 22 stories comprising 284 units. Developed by Opus Northwest, Pinnacle’s units range from 826 sq. ft. to 2,393 sq. ft. and are priced from $279,500 to $1.7 million.Continuum Partners is developing Kent Place, a $400 million project with phase one of three anticipated for completion by next summer. Those 105 high-end units, including 91 condos in two mid-rise towers, will range from $500,000 to $2.5 million.And One Lincoln Park, just opened in downtown Denver at a cost of about $140 million, sold 144 of its 180 units by mid-September. Units in the 32-story tower range from 882 sq. ft. to 4,330 sq. ft., and run $375,000 to $2.574 million. One Lincoln Park, developed by Osborn Development, will ultimately include more than 1,000 residential units and 150,000 sq. ft. of office space in several more towers.While eco-friendly projects have typically been restricted to office buildings, a decidedly green new apartment community is the $60 million-plus Asbury Green near the University of Denver, which broke ground last summer. Denver-based MacKenzie House, in a joint venture with Harrison Real Estate Capital, has started construction on the 171-unit, four-story development, on tap to be the first Leadership in Energy and Environmental Design (LEED)-certified apartment building in Denver.MacKenzie is targeting Asbury Green at upperclassmen and graduate students from the university.In nearby Boulder, The Peloton, a $143 million, 380-unit urban development, has sold 71 units as of mid-September, according to public records, with prices ranging from $269,900 to $995,550. The outside shell of phase two, with another 190 units, was expected to be finished this fall.Boomtown Phoenix Is Down In contrast, the health (or lack thereof) of the multifamily housing market in Phoenix can be tracked by sales. According to Sterling American Property, about $404 million in sales have been completed in the Valley of the Sun, compared with an all-time record $3.5 billion in 2007. It’s a remarkable situation for the Valley, which had been one of the country’s fastest growing metro areas.”And what is selling is a lot smaller than it used to be,” observes Bill Hahn, senior vice president for Sperry Van Ness in Phoenix.While Phoenix’s physical vacancy sits at about 12 percent, its economic vacancy rate—taking concessions into consideration—may be as high as 20 percent. Thus, while rents have been somewhat flat in 2008 compared with 2007, the concessions that owners are offering have reduced profitability. Phoenix submarkets with the highest vacancies include Peoria/Sun City (19.6 percent), North Tempe (17.1 percent), West Central Phoenix (14.5 percent) and the West County area (14.3), according to a second-quarter 2008 survey by RealData Inc./Phoenix. Not surprisingly, all multifamily complexes in West Phoenix are offering concessions. Valley vacancies have been driven by job losses—about 5,500, according to Sperry Van Ness—and population defections. Arizona has one of the toughest immigration policies in the country, with fines for employers hiring undocumented workers. The general assessment is that a worsening economy, plus a hostile political climate toward illegal immigrants, has caused an out-migration of people who might be most likely to rent Class C units.There are healthy areas in the Valley. North Scottsdale, for example, is enjoying the highest average rents in the area at $989, according to RealData, and North Paradise Valley, at $937, isn’t far behind. However, North Scottsdale rents were averaging $1,031 as recently as 2006 with a 7.1 percent vacancy rate; vacancies here are now at 12.4 percent—an all-time high for this submarket—so even healthy areas in Phoenix are being impacted. “The North Scottsdale submarket has lost a high proportion of its apartment units to conversions— about 41 percent,” says Pete Tekampe, vice president, investments, with Marcus & Millichap in Phoenix. “But two-thirds of those units were sold to prospective landlords and never left the rental pool. The result is the remaining communities that didn’t convert have had to remain competitive with those that converted, many with very low rents, just to attract a warm body. So average rents have fallen.”Looking on the Bright SideThe phenomenon of unsold single-family homes entering the rental market is also a big culprit in falling multifamily rents. Some have placed that number at 150,000 rental homes in the market. “On the bright side, we’ve been selling smaller, 20- to 40-unit complexes, supported by bank financing and with downpayments of around 25 to 35 percent,” Hahn says. “Another thing coming ba
ck into the market is seller financing, which we haven’t seen in a long time. Long-time owners, who are sometimes free and clear, will create the financing to set a price.”Another piece of good news for the Valley of the Sun: the Multiple Listing Service is reporting that there are about seven or eight months’ worth of multifamily supply on the market, down from as much as 15 months’ supply in 2007.One of the newest developments in Phoenix is La Siena, a senior community in north central Phoenix. Developed by Opus West and RED Group, in partnership with Seattle-based property manager Leisure Care, La Siena totals 190 units.It will be interesting to see how Phoenix’s developers respond to the new Arizona State University campus downtown. Multi-unit development conceivably could cater to an older student population, much like the new Asbury Green development is doing in Denver. PHOENIX METRO AREA Average Highest Submarket RentsNorth Scottsdale/Fountain Hills: $989North Paradise Valley: $937South Scottsdale: $889Chandler: $879North County: $879 Average Lowest Submarket RentsWest Central Phoenix: $603Central Black Canyon: $603West Phoenix: $653Glendale: $653Metrocenter: $670Source: RealData Inc./Phoenix