Ducks in a row. “[A]ll the stars seem to have aligned just right for the market,” Inside Tucson Business reported in August. “Three major areas have been addressed: the glut of foreclosures; the shortage of student housing [see Special Real Estate Factors]; and the need for high-end luxury product.” Apartments, notes this source, “are very hot.” Notably, apartment markets across the country in the recent period have thrived without great assistance from job growth. Although job creation and economic expansion are significant factors in generating demand for rentals, other factors—weakness in the single-family market in particular abetted by a slowdown in apartment development—have contributed substantially to the strengthening of markets nationwide.
The virtual halt to standard market-rate apartment construction in Tucson alongside high net absorption totals has tightened the market. Indeed, with Reis reporting the completion of only 264 market-rate apartments over the entire two-year span 2010-2011, same-term net absorption was counted at 2,393 units. The trend has continued: first half 2012 net absorption, accompanied by no new supply additions, was 425 units. The July-August period added 169 units to the year’s net absorption sum. Accordingly, an investment specialist with PICOR Commercial Real Estate Services informed Inside Tucson Business, “There’s a shortage of certain-type inventory,” including student housing inventory. Thus developers, in anticipation of the rush, bought $8 million of land last year, according to a partner at Chapman Lindsey Commercial Real Estate. The land acquisitions led to the development and recent opening of the District on Fifth student housing complex, all 750 “beds” of which were leased long before the project’s August 2012 opening.
Construction of standard market-rate projects has also been busy. Since the end of the second quarter, 654 such units completed construction in four projects, Reis reports. Of these, the largest, completing in July, was the 304-unit Encantada at Riverside Crossing at 1925 W. River Drive, Tucson. An October completion is cited for 208-unit Place at Creekside at 9971 E. Speedway in Tucson’s Pantano submarket. The year 2013, meanwhile, is expected to produce a smaller market-rate completion total. Indeed, no projects of this type are currently under construction, and only one seems imminent: a November start is scheduled for the 288-unit Encantada at Steam Pump Ranch on N. Oracle Road in the North/Northwest submarket. A July 2014 completion date is cited.
Vacancy ended the latest quarter at 6.0%, down 20 basis points for the period, down 140 year-over-year. While July’s large completion total pushed the vacancy rate upward slightly (it closed August at 6.2%), additional declines are expected by year-end. Rent growth, moderately positive since 2010, has accelerated. At $673 and $634 per month, asking and effective averages for the latest quarter were up 0.8% and 1.1% since the first quarter and were up 1.4% and 1.9% since year-end—on the heels of growth rates of 1.4% and 1.8% for 2011. July-August 2012 followed with gains of 0.4% and 0.3%.
Reis expects positive net absorption over the remainder of the year to point the vacancy curve downward: a year-end rate of 5.3% is forecast along with gains of 2.8% and 3.8% for the asking and effective average rents. Vacancy will have descended to nearly 4.0% by the end of 2013 amid still stronger rent growth.