Tucson Multifamily Market Hits Historic Low

TUCSON-In 1994, multifamily vacancies in the metro area slid to just below 5%. To meet the demand at the time, 6,000 units were delivered. Twelve years later, Tucson is hitting the same low vacancy, but with a difference.

"We can't build 6,000 units," says Mike Chapman, vice president with CB Richard Ellis' Tucson office. "We're finally in a market that has limited supply and increasing demand for the first time ever."

In a report earlier this year, Chapman concluded only 300 units were going to be added this year to the 98,000-unit inventory. In a more recent report, Marcus & Millichap Real Estate Investment Brokerage Co. simply supported Chapman's figures, pointing out that only 360 new units will have delivered by year's end.

There were some differences between the reports, however. Marcus & Millichap's 57,130-unit inventory takes into account complexes with 40 or more units while CBRE factors in most complexes in the city. The Marcus & Millichap report indicates a 5.5% vacancy; Chapman says it's just under the 5% mark.

Part of the reason for dwindling supply is deterrents for construction. One such deterrent is rising construction costs, according to David Wetta, managing director with Marcus & Millichap and regional manager in Tucson. That and condo conversions have slowed deliveries of rental units to the market. "The development and entitlement processes are longer than they've been," Wetta tells GlobeSt.com. "It takes longer to get construction done."

On top of it all are economic drivers contributing to what Chapman characterizes as historically low vacancy rates. "It was reported in the newspaper about three weeks ago that we hit one million people in Pima County," he says. "That means during the past 12 months, the population grew by about 30,000 people."

Previously, the highest growth period was 1994 when the city increased by 24,000 people. Also adding to the scenario is a shortage of zoned multifamily land. Much of the quality land for such projects has been taken over by condominium developers or single-family homebuilders.

The result is large demand and shrinking supply. While it hasn't gotten to the point where developers are facing the prospect of razing single-family homes to build multifamily complexes, Chapman says a rental housing shortage with high rental rates isn't too far off. "At some point, the city will have to address the issue," he says. "They might have to change rezoning or other plans to meet the present and future demand."

Wetta points out that, from his perspective, the city is starting to get somewhat smarter about development. "Tucson is growth-friendly compared to a lot of growth markets," he says. "But they aren't the 'build anything you want and let 'er rip.' They're trying to be more cautious about what gets added, where and if it fits into the community."