(Graph by: PhoenixMarketTrends)

We’re currently revamping Arizona Apartment Investor into a new design, actually it’s been in the works for a while: until it’s completed shortly some updates will be located at PhoenixMarketTrends.com, like the most current look at the triplex and fourplex market in Greater Phoenix.  I chose only triplexes and fourplexes because I happen to like this size, it’s easy to buy and sell: it can be done so via a residential loan like FHA, VA or conventional, these are purchased by investors and owner occupant/investors and they are a good gauge of the small multifamily market.

Please continue reading here.

Some investment related articles we did at PhoenixMarketTrends.com

• Case Study: A Central Phoenix Condo From Lender Owned To Long Term Investment:

This is a case study of a condo purchased by an out of town investor.  It was a lender owned property taken from a plain dirty place to a wonderful inviting home.

• How To Search For Income Multifamily Properties, Duplex, Triplex, Fourplex, In Greater Phoenix.

There are several ways to search for multifamily properties, here and at Phoenix Market Trends and we review them here.

• Being An Active Investor Is The Way To Passive Income

I like this post because I believe you have to be responsible for you own assets and that includes real estate, though your involvement may be limited, but it needs to be there.

• Real Estate Investment Strategies: Opportunities For High Long Term Returns With Multifamily

Multifamily is now in a many year low.  You can find properties priced at the same levels at the 1980’s.  That’s just extraordinary and there is a clear reason for it.  Just the same, there are very good reasons why well purchased multifamily properties will do well in the future, maybe even the near future.

The CCIM Institute’s magazine, “Commercial Investment Real Estate” reports the following:

“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.

It’s a busy market out there.  All the good stuff seems to be disappearing : from good condos, homes, to small multifamily.

The supply of multifamily fourplexes is quickly dwindling sway.  Most of the good stuff is selling quickly as investors realize how good they have it now.

Except that properties will not wait for them.  There is plenty demand now that supply is removed within 2 months on average and good ones sell in a matter of a week or two.

There are 235 active fourplexes.

89 are Pending

83 Sold in the last 30 day.

Another 21 are Pending with instructions to leave Active.

This puts the supply of fourplexes in Greater Phoenix at 2.9 Months.

Some news purporting the strength of multifamily in the next phase of the cycle.

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.

In the small multifamily unit market, 2-4 units, there are 559 active properties.  70% are lender owned or short sales.

In other words normal seller should simply stay out of the market because it will be a pure fluke if they get a buyer even if the property makes sense and there are some very good properties out there by normal sellers.  Many are in very good to excellent condition, well managed and with little deferred maintenance but they are not bank owned so they get very little attention.

If we look at the Pending properties, there are 133 right now, only 4 are normal sellers.  The rest are lender owned or short sales.  Prices range from $24,000 to $250.000 and hover in the area of $37,000 per unit.

$37,000 per unit sound very attractive but often these need a lot of work.  Not only cosmetic work but deferred maintenance plus they are vacant non income producing units.  These need to be factored into the analysis.

Since January 2009, 122 units.  Based on this there is, roughly -since we don’t have March sold number yet, a 14 month supply of residential multifamily properties.

The tenant pool is increasing for the smaller apartment building properties.  These buildings tend to be a bit older with less amenities and command a lower rent.  With a lower incomes and some uncertainty vacancy rates for well marketed small multifamily properties are lower then larger complexes with offer lots of amenities but higher rent.

Priced for small multifamily properties are very attractive resulting in good returns, especially when partnered with good financing, these can make very good cash flow positive income properties that can be held for a long time.

Financing is a bit more difficult to obtain, usually 25%.  Some buyers decide to purchase a fourplex as an owner occupied property- for that purpose.  Loans for owner occupied multifamily properties can be purchased for as little as 3.5% down with an FHA loan and they will still cash flow.

Artur Ciesielski, CCIM 602.628.4349 

The recent Apartment News a publication of the Arizona Multi-housing Association reports that vacancies in the valley are at "record levels"

In the valley rents dropped by $3.00 to $770.00 on average.  This is, "the first year to year decline in the same quarter (3Q’08) since 2003.  Vacancies stood at 13 percent, a record high for the Valley."

While the data compiled is for larger properties the smaller properties those 3-20 units have similar results.  From what I have seen and in doing the occasional rental survey, vacancies – both economic and physical are up. 

Competition has increased.  Driving through neighborhoods potential tenants are faced with many choices even in some of the more desirable rental neighborhood where vacancies were usually low.

It is difficult to find a tenant and a lot of effort has to be forth to entice them to even look at units.  Even in the advertising outlets there has been a surge of properties. 

So why so many vacancies if homes are so difficult to buy?  Well, homes are difficult to purchase but not in all segments.  In fact, sales of homes under $125,000 have increased 5,200% over last year.   The spurt of affordable housing has enticed quite a few tenants to buy homes. 

Increased competition from rentals includes homes and some tenants have moved into single family homes.  A very common occurrence is consolidation of families from multiple living units to one: families and friend are moving in together.  On the other hand we have had some interest from people who have decided to rent their home which has a higher mortgage and find a lessexpensive apartment: though this is a very small slice.

Either way, the rental market -whether for apartments or homes- is soft.

The NAR reports:

With the exception of cash transactions, investment activity in commercial real estate sectors is nearly at a standstill because commercial lending has essentially halted, while job losses are curtailing the demand for space, according to the latest Commercial Real Estate Outlook of the NATIONAL ASSOCIATION of REALTORS®.

Lawrence Yun, NAR chief economist, said there are serious structural problems in commercial lending. “Although access to residential mortgages has improved, the opposite is true for commercial loans,” he said. “We need liquidity for commercial mortgage-backed securities not only to free the market, but also to rollover existing debt. At the same time, the loss of jobs has had a significant impact on the demand for commercial space.”

Yun added that default rates on commercial real estate loans are very low by historical standards. “However, commercial defaults could deteriorate significantly without a properly structured stimulus that addresses liquidity for commercial mortgages,” he said.

REALTORS® Commercial Alliance Committee chair Steven Good, president and CEO of Sheldon Good & Co. in Chicago, said market conditions are very challenging. “Given that supply and demand for commercial space varies greatly depending on location, it’s important for businesses who want to sell or lease space to consult with a practitioner familiar with local conditions,” he said.
The NAR 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.

Multifamily Market
The apartment rental market—multifamily housing—continued to benefit from weak home sales. Multifamily vacancy rates are forecast at 5.8 percent in the third quarter of 2009, unchanged from the third quarter of this year. Markets with the tightest vacancies include San Diego, northern New Jersey, and Boston, with vacancy rates of 4.2 percent or less. Areas with the highest vacancies include Jacksonville, Fla., Phoenix, and Orlando, Fla., with vacancies of 8.5 percent or higher.

Average rent is projected to grow 2.9 percent in 2008 and 2.8 percent next year. Multifamily net absorption should be 24,400 units in 59 tracked metro areas this year and 142,000 in 2009.

Source: NAR

As noted above the vacancies are up.  This is very evident with the many rent concession signs around the city though prices have improved to levels that even with a higher vacancy a complex can cash flow.

Sales of small multifamily properties are on the rise especially over last year.  23 sales may not seem like much but it’s 65% higher then last year.  Still the prices are down significantly.  This is mostly due to the abundance of foreclosed and pre-foreclosure properties that have sold or are for sale. 

The first chart shows total volume in dollars and the average per property.  More units but for lower prices.  This is not good for motivated sellers but it’s really good for buyers who can buy properties with strong cash flow.  I have seen properties in good areas with a 14 Cap rate in good areas.  A client calls such areas the "arm pit of a neighborhood" and these are often good buys: weak properties in a strong neighborhood, that is.

The chart below shows inventory levels, new listing and sales of 2-4 unit properties in Maricopa County.  This is further broken down in the second chart below. 

Despite the increased sales inventory, while down, sill is high.  There was an inventory of 597 properties: 104 were new to the market.  Each month we add some 100 properties to the market, 4-5 times the sales.  So where are these properties going?  Some are sold but many are removed from the market, some are recycled – changed agents – and others go into foreclosure.  It’s not pretty out there but it’s beautiful for buyers in a strong financial position, those with access to financing and/or cash.  Some of these would make great owner occupied properties allowing one to live nearly for free.