by J. Craig Anderson The Arizona Republic Jun. 17, 2010 12:00 AM
Commercial-property owners are counting on apartment buildings to lead the Phoenix area’s real-estate market toward recovery, based on a recent rebound for units rented and buildings sold.
That means renters are less likely to see future discounts and giveaways as aggressive as those they have received in recent years, although the mild recovery has not translated into higher rent prices thus far.
An immediate recovery for rental housing is by no means assured, but after two years of dismal sales and high vacancy rates, the double shot of good news has left some local real-estate professionals with a sense of hope.
“We are seeing a tremendous amount of buyer interest for multifamily assets in the Phoenix area,” said Bret Zinn, vice president of multifamily investment services for commercial real-estate firm Transwestern in Phoenix. “There is a scarcity premium being paid today, as the availability of saleable assets does not meet the demand of the deepening pool of investors.”
Zinn, a 15-year veteran of the apartment-sales business whom Transwestern hired in late January in anticipation of a market upturn, said significant losses in the value of apartment communities over the past two years are responsible for the shortage of buildings for sale.
As with all commercial real estate, many apartment owners are “upside down” on their commercial real-estate loans, meaning that they owe more on the loan than the property is currently worth, he said.
Zinn said most commercial real-estate lenders have been reluctant to accept the financial losses they would incur from approving short sales on the properties.
“Owners of apartments that would like to sell and take advantage of the many well-capitalized buyers in the marketplace are not able to do so without getting their lenders to agree to take a loss,” Zinn said.
Still, the return of buyer demand is a positive development that has yet to happen with most office, retail and industrial properties.
In the fourth quarter of 2008, only three apartment buildings changed hands. A year later, that number had increased to 13 sales, and it has gone up every quarter since then.
In the first quarter of this year, 18 apartment buildings were sold, compared with 13 in the first quarter of 2009. In the second quarter this year, 19 more were sold.
Nationally, the rental-housing market took a positive turn in the fourth quarter of 2009 and posted even bigger gains in the first quarter of this year, with the value of apartment properties increasing by 3.3 percent.
The same cannot be said for apartments in the Phoenix area, where the average sale price per square foot decreased by 20 percent from the first quarter to the second quarter, going from $43.91 to $34.83.
But other indicators have turned positive this year, including a huge jump in net move-ins, from 531 units in the fourth quarter to 4,179 in the first quarter. Total move-ins during the first quarter of 2009 was 1,121 units.
Apartment-building and other commercial real-estate owners across the U.S. have struggled to survive since the overbuilt real-estate market began to collapse in late 2007.
Job losses, a mass exodus of Hispanic residents and ever-growing competition from investors in foreclosed single-family homes have contributed to a precipitous drop in apartments’ value and an explosion in vacancies, experts said.
Apartment buildings usually lead the commercial real-estate market during both upswings and downturns, because the tenants’ leases, from six to 12 months, are shorter than with other commercial-property types.
A number of real-estate-related businesses that haven’t traditionally gotten involved in the rental market are doing so now, hoping to ride what passes for a positive wave.
One of those businesses is Internet home-listings site Trulia.com, which in November added rental-property listings to its online portfolio.
Trulia.com spokesman Kent Schumann said Web traffic to apartment-finding sites such as Rent.com and Apartments.com doubled during the past year.
“Seven of the top 20 real-estate (web)sites now are for rentals, whereas a year ago there were only three,” Schumann said.
Those numbers don’t necessarily add up to higher revenue for apartment owners, said Jon Pastor, founder and CEO of RentJungle.com, a Google-inspired apartment-finding service that Pastor launched in September.
The recent surge in available single-family homes for rent has kept many apartment owners from seeing the increased demand for rentals translate into lower vacancies and higher rents, although the Valley did see a very slight rent increase of 0.5 percent in the first quarter, he said.
Pastor said his reason for entering the rental-property market as a technology entrepreneur was a belief that the industry’s listing and search technology was in dire need of an overhaul.
He said the two biggest factors affecting apartment vacancies are population change and consumer confidence.
Because Arizona’s growth has slowed significantly, a significant drop in vacancy would require a boost in confidence, such as recent college grads moving out of their parents’ homes and roommates deciding they can afford their own places.
One group that generally has not helped fill apartment communities is the recently foreclosed upon, Pastor added.
Most former homeowners are opting to rent single-family homes and not apartments, he said.
Still, a number of real-estate experts said they have noticed a positive change in most consumers’ attitudes toward renting in general.
“I would think that adage that it’s always good to buy a house has kind of gone out the window,” Pastor said.