While the average price per unit gone up much, it does look as if the price is fairly steady and maybe trending up, up ever so slowly and that’s good for now.

The average price is now around $24,000 per unit and it’s been hovering from $22,000 to $27,000 over the past 6 months.

What’s really changed are the total number of units being sold.  The small multifamily market also follows the seasonal trends of single family homes, that’s why you see the summer high.  Look at the number of units sold for the same period in 2010 to 2009 an notice the very huge difference.

An now with 96 pending properties and 87 in AWC mode the forecast for sales looks very strong in deed and we may even get an up tick in the average price per unit with such a low inventory of active properties compared to the demand.  As of May 12th there were 272 3-4 unit properties active with 62 of those short sales and 31 lender owned.

All the good stuff is going fairly fast and much of what’s for sale is the same stuff that was on the market half a year ago and even a year ago, so not really part of the game.

With the current sales pace there is only a 4.5 month supply of properties and if you remove the over-priced stuff it’s more like 3-3.5 months of supply pegging it squarely in the sellers market.  A seller’s market indeed, but as you know investors are fairly savvy and in this market every one is looking for a deal so sellers can’t really push up the price.

In order to get the better properties, investors are advised to have cash if possible and act quickly.  Don’t expect much more inventory, distressed inventory that is, to show up on the market anytime soon.  We’ll have a steady trickle but no major floods.

If you would like to discuss this in more detail please call me, Artur at 602.628.4349

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It’s simply supply and demand, but also the quality of the supply and the tenants perceptions that govern the rental market.

Drive almost any area in the valley and you’ll see lots of discounts on rents.  While many times those discounts are a rouse to get people calling the perception is still there that deals are abound for the tenant.

And they are.  The combination of increased inventory and also new inventory from owners who got a good deal and can undercut the competition, is driving rental prices down.

If someone purchases a fourplex for $170,000 with renovations it will be much easier to compete for a tenant then for an owners who paid more and has higher obligations. They may still have to in order to get tenants, but it will take them longer the actually bite the bullet and lower rents.

Current tenants and potential tenants know this and are able to take advantage of the situation, but asking for reduced rents, improvements to the properties or a combination of the two: actively looking tenants want low move in cost and as little in additional expenses as possible.

Having a nice apartment, a washer and dryer and especially as a small patio or yard is a definite plus and will help lower vacancy rates.  If you can, add these items and you’ll get a long term benefit.

Be prepared for this to continue for a while.

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The article, The Greater Phoenix Population Is Moving, Most Of It Down The Street, To The Home Next Door. covers how the population of Greater Phoenix is moving but simple within the same neighborhood from one house which is being sold short or going into foreclosure to another often one purchased by an investor.

There has always been some interest from people who want to combine the need for shelter and investment with purchasing a fourplex.  In the article, Where Are The Triplexes and Fourplexes More Suitable For Owner Occupants in Phoenix, I gripe a little bit and explain whey the choices for owner occupants are so limited.

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“The strongest net effective rent gains in history may occur between 2011 and 2015 as 75 million echo boomers finally can afford to strike out on their own, says RREEF Research.  This pent-up demand along with a below-average supply, limited by financing constraints and fewer construction starts in 2010 and 2011, will boost rents quickly.”

The Phoenix market has depressed pricing for multifamily, especially the smaller properties that saw a huge speculative run up during the recent boom.

With the depressed pricing, high cap rates and the coming “pent up demand” maybe now and the next year or two will be a rare opportunity with a quick payoff.  It’s sure starting to look this way.

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What is difficult is financing.  You need that 20-25% down plus healthy reserves and very solid credit, plus not more then 3 other leveraged properties.

The larger properties 5+ units and especially mid sized and larger properties with commercial financing will have that window open up in the coming year as loans come due and are unlikely to be renewed.

At the same time it will be difficult to finance these properties, though cash buyers will be in a very good position to buy well positioned properties.

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Housing experts predict that multi-family rental properties and apartments will recover fastest from the current downturn, followed by housing in cities that didn’t overbuild.

The market is likely to hit bottom in the next few months, says Bernard Markstein, senior economist and director of forecasting for the National Association of Home Builders.

“Next year will see slow but steady improvement, as home builders are controlling their inventory,” Markstein says.

Apartments and other multi-family residences will snap back quickly once businesses start hiring again, predicts Victor Calanog, director of research at Reis.

Baby boomers looking for retirement homes and first-time home buyers also will lead the way out of the decline, predicts Bill Singer, a securities attorney and trader who is a member of Forbes.com’s panel of financial gurus.

In Greater Phoenix we did overbuild but in certain sub-markets we did not. While there is plenty of hosing, land and lots with pipes sticking out of the ground ready to be built once the demand picks up, not everyone will be as eager to live on the outskirts: it will take a while if ever for people to get comfortable, en mass, with the idea again.

The central location, Scottsdale, Phoenix, Tempe don’t have much room to grow except infill plus the population is increasing naturally plus the draw of a reviving urban city. These will help sustain and grow the demand for multi-family housing in Phoenix.

While rents in many areas have decreased they are holding steady in the urban areas. Once the market picks up, higher prices will keep people from being able to buy a home or condo. Plus as the economy becomes more mobile and agile there is no need for a growing population to even own real estate. Owning is not fore everyone and this maybe a realization that finally takes hold: for many it’s better to rent and there is nothing wrong with that.

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At Arizona Apartment Investor we focus on multifamily properties, managing them, analyzing and so on.  This might turn off some readers who just want to find a nice home in Central Phoenix to live in so we have a separate blogsite, namely Arizona Apartment Investor.  None the less some articles are cross posted and some are referenced.  In this case we have two articles which also have relevance to multifamily investors.

1. Using Your Self Directed IRA To Invest In Real Estate.

2. Six Reasons To Buy Real Estate Against The Crowd.

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"Organizations representing the rental side of the real estate market are lobbying against proposals for home buyer assistance.

The National Multi Housing Council (NMHC) and the National Apartment Association (NAA) both oppose proposals for a federally financed interest rate buy down on mortgages or any overturn on bans on seller-financed down payment programs.

"The government should not be using taxpayer dollars to sustain inflated housing prices. When prices return to market levels, buyers will return. Such a resettlement will not only restore affordability to the housing sector, it will also put it on a much stronger footing going forward,” says Doug Bibby, NMHC president.

Bibby quotes the Nation Association of Home Builders (NAHB), which estimates that despite economic challenges, it expects Americans to buy 5.1 million homes next year. “Giving these buyers a $22,000 tax credit, as NAHB has called for, would mean $112 billion in wasted subsidy to buyers who would have bought a house anyway,” Bibby says."

Source: National Multi Housing Council (11/13/08)

While usually a slow home buyer market is good for apartment owners, this one is different.  During the boom there was an abundance of investors in single family home.  Many of these homes were purchased as rental homes and it’s no different now.  A large supply of good homes and low prices means buyers are buying and investors are as well by putting some of the stock back in the rental pool and putting pressure on apartment owners. 

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"The disruption in the capital markets means many commercial real estate transactions have been canceled or postponed, while the weak economy has eroded otherwise healthy market fundamentals, according to a commercial market update and forecast presented at the 2008 REALTORS® Conference & Expo..

Lawrence Yun, chief economist for the NATIONAL ASSOCIATION OF REALTORS®, said the weak economy has shifted the fundamentals in commercial real estate. “With the exception of the multifamily sector, the loss of jobs is reducing demand in commercial real estate to the point where many markets can expect rents to weaken,” he said. “Vacancy rates are trending up, but the completion of new commercial space will decline in response to lower demand.”

Yun said the credit crisis has hit the commercial real estate market harder than the residential sector. “Even sound transactions in healthy markets to buyers with good credit were curtailed,” he said. “Credit has started to loosen somewhat, but we have a long way to go to get back to normal. In addition, commercial debt rollover is now facing much higher interest rate costs.”

In some cases, economic conditions led to properties becoming undervalued.

Doug Duncan, chief economist at Fannie Mae, said over-leveraged financial firms led to the unraveling of credit on Wall Street. “Central banks around the world are cooperating as never before to stabilize the credit markets,” he said. “Since the beginning of this year, 1.3 million U.S. jobs have been lost. Initially it was confined to the real estate and real estate finance sectors, but it’s broadened recently—we’ve lost a half million jobs in just the past two months.”

Duncan said an economic recovery depend on a housing recovery. “Everything depends on the structure of the economic stimulus,” he said. “Mortgage spreads over Treasuries rose from 1.5 percentage points to 2.25 percentage points. In addition, when the commercial paper market stopped, all short-term financing evaporated. We need to be able to securitize loans.”

Duncan said commercial mortgage-backed securities have a chance of coming back faster than residential mortgage securities because there is a feedback loop. “Due to ratings based on performance, there is an incentive to produce well,” Duncan said.

As a result of these challenges, transaction volume in commercial real estate fell 70 percent from the second quarter of 2007 to the second quarter of 2008.

Yun’s forecast for four major commercial sectors analyzes quarterly data in the office, industrial, retail, and multifamily markets. Historic data were provided by Torto Wheaton Research.

Office Market

The loss of jobs is reducing the demand for office space. Office vacancy rates are projected to rise to 14.4 percent in the second quarter of 2009 from 12.9 percent in the second quarter of this year. Annual rent growth in the office sector is likely to be 3.2 percent this year, but it should decline 0.4 percent in 2009; rent grew 8.0 percent last year.

Net absorption of office space in 57 markets tracked, which includes the leasing of new space coming on the market as well as space in existing properties, is expected to be 14.7 million square feet this year and 10.9 million in 2009, contrasted with 57.3 million square feet last year.

Industrial Market

Healthy exports have been offsetting lower demand for industrial space from the economic slowdown, but uncertainty in the current environment could weaken overseas demand, even with the relative weakness of the dollar which has been a primary support of export activity. Still,, American goods remain attractive to overseas buyers.

Vacancy rates in the industrial sector are forecast to rise to 10.8 percent in the second quarter of 2009 from 9.9 percent in the second quarter of this year. Annual rent growth will probably be 1.1 percent this year and 1.0 percent in 2009; it rose 3.6 percent last year.

Net absorption of industrial space in 58 markets tracked is anticipated to be a negative 16.7 million square feet this year, then reversing to grow to 35.3 million in 2009; net absorption totaled 120.3 million last year. A clear pattern of building to suit specific needs remains, leaving many obsolete structures unoccupied.

Retail Market

Consumer spending will continue to tighten for the foreseeable future, with further dampening of the retail market.

Vacancy rates in the retail sector should be 10.4 percent in the second quarter of 2009, up from 9.7 percent in the second quarter of this year. Average retail rent is projected to grow 1.2 percent in 2008 before contracting 0.9 percent in 2009; rent grew 3.2 percent last year.

Net absorption of retail space in 53 tracked markets is likely to shrink by 2.6 million square feet this year before increasing by 2.8 million in 2009; last year 11.1 million square feet were absorbed.

Multifamily Market

The outlook for the apartment rental market – multifamily housing – continues to stay fairly positive as many potential first-time home buyers remain on the sidelines.

Multifamily vacancy rates are expected to rise to 5.9 percent in the second quarter of 2009 from 5.4 percent in the second quarter of this year. Average rent is forecast to grow 3.9 percent in 2008 and 4.0 percent next year, compared with a 3.1 percent gain in 2007.

Multifamily net absorption is estimated at 61,400 units in 59 tracked metro areas this year and 188,200 in 2009, in contrast with 234,400 last year.

—NAR

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