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PHOENIX-Tightening lending requirements and slowing rent growth are taking their toll on larger multifamily investments. While sales of large, class A complexes are lagging, smaller assets with good value-add potential are attracting more attention.

“From a financing standpoint, it’s a lot easier for some of the lenders to underwrite deals that are smaller in nature, probably because they’re doing around 30% to 40% equity deals on these,” Rue Bax, senior vice president with ICC in Scottsdale, AZ, tells GlobeSt.com.

Brad Goff, principal with Apartment Realty Advisors’ Phoenix office, confirms in the past two weeks that there’s been a large increase in closings for complexes trading for less than $10 million. The flurry included two complexes in Mesa and two in Phoenix.

The Mesa sales were the 98-unit Albany Apartments at 5801 E. Albany St., trading for $5.51 million, and the 48-unit Dynamic Apartments at 43 N. Harris Dr., also in Mesa, bringing $1.85 million.

In Phoenix, the 26-unit Pecan Tree Apartments at 3325 E. Pinchot Ave. drew $1.3 million and the 120-unit Las Ventanas Apartments at 6801 N. 25th Dr. brought $5.7 million.

Bax points out that the only major multifamily sale to close since the first of the year was the 412-unit Pillar at Desert View in Phoenix for $58.5 million. And that, he adds was well below its $69-million ask.

RealFacts’ latest overview for the Phoenix-Mesa-Scottsdale market bears out some of what the experts say. Total transactions of class A assets was pegged at 111 in 2007 versus 138 sales in 2006. Nonetheless, the dollar volume was higher: $3.1 billion in ’07 and $3 billion the year before.

Bax speculates larger deals aren’t as frequent as before because funds and pension advisers are sitting on the sidelines and taking a wait-and-see attitude. “A lot of the institutional players need the credit markets to open their coffers, so to speak,” he says. “The banks just aren’t doing deals right now, but that could be resolved during the next quarter.”

It isn’t just credit markets that are hurting multifamily asset sales, though. Goff says Phoenix rent growth is likely to slow up during the next year and investors are a little nervous about that. “We saw 8% to 10% rent growth in 2006, 4% in 2007 and people think it’ll be 3% in 2008,” he says.

While smaller seems to be better for this crop of investors, value-add seems to be better still. “Folks these days are looking for a property with a story,” Bax points out. “Something that might be mismanaged or needs improvement, something they can put money into and improve the rental rate. They’re buying with the idea that they’ll be holding anywhere from three to five years.”

Although the market seems to have stalled from its hot pace of just 18 months ago, neither broker is in panic mode. Bax says that, with underwriting tightening up, the clock has been turned back to 2003 or 2004, a time when buyers were driven more by cap rates and how to improve asset value and cash flow rather than seeing how high an asset on the market could be priced.

Goff agrees cap rates are more important than they were a year ago, with the current trend a correction of the overheated market. “We’re back to fundamentals in Phoenix,” he adds. “It’s likely to be a slow first six months in Phoenix until we can see the direction of rental and investments.”

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