No better news could have been reported for the Tucson apartment market than job growth, which translated into the strongest improvement in fundamentals in years. The vacancy rate for stabilized units in Tucson dropped 100 basis points (bp) from the previous quarter to 6.8%. This is the lowest first quarter rate since 2007. North Tucson, comprising Northeast Tucson (3.8%) and Oro Valley/Catalina (4.7%) reported the lowest vacancy rates. The University area experienced a 520 bps increase in vacancy, ending the quarter at 11.9%. One area of concern in this submarket is the potential of overbuilding in the student housing sector. In addition, older units, especially those in outlying areas, are losing ground in the form of lease-up and rents to newer units.
Absorption increased 918 units through the first quarter, marking seven consecutive quarters of positive absorption. This trend heralds a positive outlook for continued improvement in the market. The average monthly gross rent (without utilities) increased $12 (1.8%) to $669 per unit or $0.91 per square foot for the first quarter. The Oro Valley/Catalina submarket continues to experience the highest rents and absorption in metropolitan Tucson. Many of the newly constructed and renovated communities have been able to push up rents due to the high demand from the jobs in this area. The greater majority of Tucson continues to see stable rental rates with positives seen in reduced concessions.
The BLS reported that Metro Tucson added nearly 13,000 jobs year-over-year through February 2016, with total employment of more than 455,750 and an unemployment rate of 5.2% during this same period (subsequently dropping to 4.8%). These results demonstrate significant positive progress for the Tucson labor market. If these preliminary figures hold, this level of employment would represent a record and the lowest unemployment rate since April 2008.
Investor interest in the Tucson marketplace continues to grow for multifamily product. Many of the new investors are attracted to this market because:
1.Interest rates remain attractive; desire to lock in terms before the likely increase and election year uncertainties
2.Cap rates remain significantly higher than most of the neighboring markets
3.Recent, positive shift in job growth
These indicators contribute to Tucson’s attractiveness and timing for sellers and property owners. On a recent listing of 200+ units, over 25 showings were generated resulting in nine offers in less than three weeks. The significant challenge for buyers is the limited investment-grade inventory in the Tucson marketplace.