Tucson Nears Saturation Point

TUCSON-Nestled in a valley and rimmed by mountains, the city and its multifamily market offer an interesting picture of what happens when a region is close to saturation. While investment is strong in the area, rents haven't drifted upward.

Experts blame the low level of construction for the region's flat rents. According to RealFacts' Tucson report for the first quarter, there are 40,182 occupied units in the 43,161-unit inventory. Plus, researchers point out that no new units have come on line since 2002. The end result is occupancy is only marginally higher in a year-to-year comparison. At the first quarter's close, occupancy was 94.2% versus 92% at the end of Q1 2005.

Michael Chapman, vice president for CB Richard Ellis Tucson LLC, says his stats differ somewhat from the Novato, CA-based RealFacts. According to Chapman, 733 units delivered last year, bumping the inventory to 98,000 units. But, RealFacts only tracks complexes with 100 units or more while Chapman keeps tabs on properties with 10 or more apartments. Chapman says only 300 more units are likely to come on line in the remainder of this year. He's also predicting vacancy will actually drift below 5% for the first time since 1994.

But the idea is the same--Tucson is growing in population; home sales are slowing as interest rates rise; and deliveries are few and far between. "We only have about 13% free land anyway," Chapman tells GlobeSt.com. "We've exhausted our supply of multifamily land and it's impossible to build a whole lot more."

Greg Willett, vice president of research for Carrollton, TX-based M/PF YieldStar, agrees with Chapman's on-the-ground assessment. The stock of land zoned multifamily in Tucson is rapidly dwindling. In addition, Tucson is considered a little too small for national players, developers and investors who have staked claims in metro Phoenix to the north. "The developers come from more of a regional and local investor base," Willett explains.

In the big picture, Chapman contends it's a sellers' market with cap rates hovering 6% and so little construction in Tucson's future. "There's no way to overbuild the market here," he stresses. "Those wanting to come in here need to be willing to accept lower rates of return on their investment and not a lot want to do that."

Rents haven't budged despite low vacancies, high absorption and a fair amount of investment. The RealFacts report shows absolutely no change in asking rents for the past year.

But don't let the numbers fool you, Chapman tells GlobeSt.com. In 2005, his research showed the average rent went up $9 per month. Based on RealFacts' data, Tucson's average rent is $626 per month whereas it's $926 per month for the 15-state western region.

"We've had a lot of concessions over the years," Chapman says, "and those are beginning to go away. Just getting rid of those concessions, you can increase rents upward of 8%. That's likely to continue as the market tightens."