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PHOENIX-A “shadow” rental market created by a glut of vacant singlefamily homes and condos will continue to generate challenges for local apartment building owners, according to the 2009 forecast from Marcus & Millichap. The real estate investment services company ranks Phoenix number 31 on its National Apartment Index, down 12 places from its number 19 ranking last year.

According to Linwood Thompson, senior vice president and managing director of the firm’s National Multi Housing Group, the shadow stock’s greatest impact is being felt in outlying areas such as the Chandler/Gilbert and Goodyear/Avondale submarkets. These areas were hubs for new construction and speculative buying during the recent housing boom, and the report projects apartment vacancy rates there to trend up to the mid-teens this year. By contrast, says Thompson, affluent locations such as Scottsdale face less of a threat due to the smaller number of homes and condos being offered for rent.

Thompson blames continued employment reductions for the market’s drop in his firm’s rankings. The region is forecast to lose 28,000 jobs this year, a 1.6% drop, on top of a loss of 85,000 jobs in ’08. The employment decline has resulted in people moving out of the area or doubling up to save money, decreasing apartment demand. But Thompson says completion of new projects also contributed to the drop in rankings. According to the report, Phoenix added some 5,000 apartments to its inventory in ’08 and will add 2,200 more in ’09.

As a result of decreased demand and inventory growth, the market saw a 300-basis-point rise in vacancy last year and is expected to see another 110-basis-points rise this year, to 12.2%. The report predicts the continued rise in vacancies will lead to a 1.4% decline in the average asking rent to $768 a month and 2.9% decline in average effective rent to $691 a month.

On the investment side, Thompson says velocity is now returning to more sustainable levels as California buyers exit the market in favor of seasoned local investors. Unfortunately, he adds, there is still a significant pricing disconnect between buyers and sellers. But as pricing expectations begin to reflect current market conditions, he predicts cap rates will push up from the low-7% range.

In terms of submarket interest, the report anticipates investment activity, which had been fairly healthy in outlying areas of the Valley during the housing boom, becoming increasingly concentrated in core locations. The report authors say some buyers may target properties near the 20-mile starter line of the recently opened Metro light-rail line that connects Phoenix, Mesa and Tempe, with transit-oriented projects adjacent helping to bolster the appeal of housing close to boarding stations.

Todd Braun, senior director and director of Cushman & Wakefield of Arizona Inc., takes a somewhat more positive view of the market’s potential, noting that despite the drop in employment, the Phoenix unemployment rate remains substantially below the national average, with most job losses stemming from the termination of new home-building. He says the fact that this year’s decline is predicted to be only a third of last year’s demonstrates the region is in fact adapting well to the global economic crisis.

The slowdown in new construction is also good news, he continues, particularly since the tight capital markets make it virtually impossible to launch additional projects in the near future. Once the market absorbs the current supply of new completions, he says it will be possible for a recovery to begin.

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