MARKET SNAPSHOT: Bargain-Seekers Could Boost Tucson’s Transaction Velocity

By Erika Schnitzer, Associate Editor Tucson, Ariz.—Fewer out-of-state buyers will suppress transaction velocity in Tucson, Ariz., according to Marucs & Millichap’s second-quarter 2009 Apartment Research Report. Sales activity has fallen 56 percent in the past year.“In recent years, these investors played a large role in driving velocity and, subsequently, price growth,” says David Guido, regional manager of the Tucson office of Marcus & Millichap.For those properties with between 10 and 39 units, only one has sold at a level higher than the previous sale price, Hamid Panahi, senior associate in Marcus & Millichap’s Tucson office, tells MHN. For projects with over 40 units, he adds, only one has closed year-to-date, and it was sold for less than the previous sale price.However, local investors seeking bargains could potentially boost velocity later this year. There is also “tremendous opportunity for a buyer to purchase below or at loan amount. There are a lot of at-value properties,” Panahi says.Risk-averse buyers will continue to seek out infill properties near the University of Arizona. Properties here are anticipated to outperform due to limited on-campus housing. Projects in this submarket are sitting at a 9.4 percent vacancy.Cap rates have risen 50 basis points, averaging in the low- to mid-7 percent range. Assets built since 1980 and priced over $5 million have traded in the high-6 to low-7 percent range, while older properties traded above 8 percent. Cap rates are expected to rise in the second half of the year.Deteriorating job and housing markets—the metro is expected to eliminate 14,000 workers, about 3.8 percent of jobs, by the end of the year—is forcing apartment owners in Tucson to lower rents in order to stay competitive. Asking and effective rents are expected to decline, 1.5 percent, to $641 per month, and 3.4 percent, to $595 per month, respectively. Through the first quarter, vacancy increased 350 basis points year-over-year, to 11.7 percent. Class A properties saw a 10.9 percent vacancy level, while Class B and C projects experienced a 410 basis point increase, to 12.3 percent.Vacancy is projected to increase by 210 basis points, to 13.1 percent, following a 280 basis point rise in 2008. The shadow market, particularly in terms of single-family homes, has had a tremendous effect on occupancy levels, says Panahi.In 2007, the metro saw a 6 percent vacancy level, but the passage of Arizona’s New Employer Sanction Law in 2008 worked to eliminate a percentage of the area’s renter population, notes Panahi.The South and Southwest submarkets have recorded the highest vacancy rises—650 basis points, to 16.2 percent—over the past year, hindering the absorption of Class C units. Meanwhile, the Catalina submarket has seen a 3.3 percent increase in occupancy, as middle- and upper-income households delay buying homes. And with traditional financing terms, a typical mortgage payment is approximately $185 per month more than the average Class A asking rent.No deliveries are expected for 2009, and the planning pipeline includes just 515 units. Nearly 660 units were brought online last year. The region’s five-year annual average is 230 units.Click here to see last week’s Market Snapshot on Dallas/Ft. Worth.