Shadow Inventory Continues to Trouble Tucson Market

Tucson, Ariz.--The majority of Tucson investment activity is likely to involve distressed assets for the balance of 2011, according to Marcus & Millichap.

Tucson, Ariz.—The majority of Tucson investment activity is likely to involve distressed assets for the balance of 2011, according to Marcus & Millichap.

Investment velocity increased in 2010 by about 50 percent year-over-year, according to the investment firm’s 2011 market outlook. This increase was mainly due to the surge in distressed-asset sales. Many of the properties sold at significant discounts compared to previous sales, forcing average prices for assets in the metro to decline 19 percent in 2010.

Median price per unit declined 19 percent in 2010, to $33,300 per unit. Cap rates in 2011 are averaging between 7.5 percent and 8 percent, with top-tier assets likely to trade in the mid-6 percent range.

During the first quarter of 2011, vacancy declined 30 bps, to 9.9 percent, according to Marcus & Millichap; this followed a 150-bp year-over-year decline. The North/Northwest Tucson and Central Tucson/University-North submarkets tend to outperform the rest of the metro, with vacancy in the 6 percent range. In 2011, vacancy is expected to improve 120 bps.

Fewer than 100 units were added to the market’s existing stock last year, with the planning pipeline containing only 352 units—to be delivered in 2013.

Because the housing market remains weak, however, there is significant shadow inventory from homeowners renting their homes rather than selling.

Asking and effective rents increased 0.9 percent and 1.3 percent, respectively, in the 12 months ending first quarter 2011. The 2011 outlook suggests that monthly asking and effective rents are projected to rise an additional 2.8 percent and 3.5 percent, respectively.

While Tucson is projected to add 3,500 jobs throughout 2011, the metro unemployment rate rose 130 bps, from 7.8 percent to 9.1 percent, from May to June, according to the Bureau of Labor Statistics.