September 2023 Multifamily Trend Report

Introducing Holualoa’s Exciting New Product Lines: Lanai and Dwell

Arizona’s housing inventory continues to be undersupplied due to strong population and job growth combined with higher construction costs and rising interest rates. Accordingly, housing is getting more and more unaffordable in the Phoenix and Tucson markets. In an effort to address the problem, one of the strategies that Holualoa is focused on is the development of multifamily communities that offer an experience between traditional Class A and older Class B apartments while remaining affordable for middle-income households.

In addition to investing in Cabana and Streamliner communities, conceived and developed by our partner Greenlight Communities, which include two new properties in Tucson— Cabana Bridges and Villa Cielo Cortaro—discussed elsewhere in this month’s publication, Holualoa is launching two new product lines, Lanai and Dwell.

A Growing Demand for Affordably Priced Housing

Arizona has been one of the fastest growing states in the past decade due to its business-friendly environment, relatively low cost of living and doing business, favorable climate and proximity to major domestic/international markets. Arizona’s demand drivers for housing are forecasted to continue yielding high levels of future growth.

Much of this growth is concentrated in middle-income jobs in manufacturing, logistics, technology, hospitality, healthcare and business services. This middle-income job growth is fueling demand for housing at lower price points, affordable for households making between 80% and 120% of the area median income (AMI).

Since the 2008 recession, the housing market has been undersupplied and has fueled some of the nation’s fastest home price appreciation and rent growth. Rent growth averaged above

continued on page 3

Dwell Tempe

Multifamily

Ithas been a tumultuous year for multifamily, surrounded by screams of “Not Enough Housing!” from all sides. With extremely tight supply and interest rate hikes, developers, planning officials, appraisers, brokers, lenders, and builders dealing with this broad array of geopolitical and economic headwinds come together in this issue and offer solutions to the housing crisis we face. I see Trendreport’s contributors to this issue more like heroes and am reminded: “Heroes Don’t All Wear Capes—Some Wear Construction Boots!”

Holualoa’s CFO, Lani Baker, introduces us to two exciting new multifamily product lines that fill essential needs in this changing market and their partner, Greenlight Communities, Senior Partner, Bob Lyles, updates us on two developments under construction in Southern Arizona that will bring an additional 484 units.

Meanwhile, the City of Tucson is responding to developer challenges with increased zoning support tools for multifamily areas, as Koren Manning , Deputy Director of Planning and Development at the City of Tucson, explains in “Zoning Tools Spur Multifamily Development in Tucson” improvements that can be seen in the construction pipeline activity too.

Nationally, the single-family BTR market faces continued demand, as Pete O’Neil , Director of Research at Northmarq, discusses.

We welcome back Allan Mendelsberg and Joey Martinez; these Multifamily brokers with Cushman & Wakefield| PICOR bring their insights in “Market Beat: Tucson Multifamily Q2 2023,” showing the resiliency and strength of the Tucson market for small and mid-sized complexes.

Arizona Multifamily Association President Courtney LeVinus speaks for her members, and their concerns in “AMA President Outlines Issues for 2024.” She shares research that Tucson ranked #2 in the nation for rent growth from Q1 2019 to Q1 2023, while Phoenix was #15.

It’s certainly not the market of 2021 when more buyers were actively looking for homes, buoyed by record-low mortgage rates and, for many households, increased savings as spending on travel and other

activities had waned during the pandemic’s peak.

Will White of Tucson’s Land Advisors Organization illuminates the perfect storm for the BTR products in “Strategic Proactivity in the Tucson Rental Market: Navigating High Demand and Soaring Land Prices.” While Ajay Madhvani, MAI, of AM Valuation Services, PLLC, provides even further clarification in Tale of Three Cities comparing Tucson, Albuquerque, and El Paso in “Apartment Market Insight from an Appraiser.”

Not to forget, our neighbor to the north, John Kobierowski, President of ABI Multifamily, brings the similarities and differences found in the Phoenix market in “Phoenix Fundamentals Strong Amidst Market Uncertainty.”

Hamid Panahi and Clint Wadlund, with Marcus & Millichap’s IPA, share their thoughtful approach in “Development Pipeline Remains Strong” as Hamid and Clint first saw the storm brewing in last year’s Trendreport.

The instability in the capital markets and rapidly rising interest rates have significantly lessened multifamily investment activity and will continue. The CBRE Team of Kevin Prouty, Brian Prouty, Tim Prouty, and Therese Witz with CBRE Debt and Structural Finance Group explain in “Elevated Rates Likely to Continue for Multifamily Loans for Foreseeable Future.”

Jim Tofel of Tofel Construction, a leading affordable housing general contractor, brings us what is happening at the street level. From large multifamily complexes to tiny homes—the founders of The Urban Infill Project, Valerie Lane and Lisa Bowers, share their unique perspectives as a new “tiny house” contractor.

To all who helped with this Trendreport issue, we extend our sincere thanks. These noted individuals sharing their time and knowledge make these reports possible.

In addition, we thank the Trendreport team: Patti van Leer, Michael Rossmann, Melissa Vucijevic, and Jack Paddock.

We will be starting work right away on next month’s Officeissue.

We also thank you, our readers, for your continued support. As always, we appreciate your feedback and welcome your comments!

Schutte Karen Schutte TREND report Managing Editor

5% per year before accelerating to 20% in 2021. The strength of these fundamentals has supported a growing pipeline of new projects, but due to a below average amount of development in the decade after the Great Recession combined with current increasing construction costs and interest rates, new development has not kept pace with demand.

Moving Ahead

Greenlight has 20 Cabana and Streamliner communities in Phoenix and Tucson in various stages of development. Holualoa is adding additional types of multifamily communities to access a greater variety of sites and meet market demand. Holualoa’s multifamily product line now includes lower-density, suburban communities under the “Lanai” brand and higher-density, urban, midrise apartments under the “Dwell” brand.

Lanai: Redefining Indoor/Outdoor Living

Lanai is a new approach to market-rate apartment communities that prioritizes affordability without compromising quality of life for its future tenants. Lanai is a suburban multifamily community featuring four-plex buildings offering every resident a corner-unit with private entrance, abundant natural light, indoor/outdoor living with large 180-280 SF patios (lanais), and access to property amenities at rental rates targeting middle-income renters.

The first Lanai community is strategically located in the growing community of Buckeye, Arizona. We chose Buckeye due to the number of companies that have recently chosen Buckeye to locate new facilities including the KORE Power battery plant. The influx of workers and their families resulting from this job growth has created demand for market-rate, yet affordable, housing in the submarket.

Dwell: Elevating Urban Living

In urban settings, infill locations have gained popularity due to their convenience and accessibility. Holualoa’s Dwell product line is designed specifically for these urban environments, delivering market-rate apartment communities at mid-level rental rates. One of the features of Dwell communities is an outstanding location with great walkability to jobs, restaurants, and retail areas.

The first Dwell community is under construction and features a four-story building with 129 apartment units over podium parking. Construction is expected to be completed during the second half of 2024. The site is located in Tempe, Arizona, near ASU’s main campus in the thriving North Tempe market, within minutes of two commuter rail lines and Mill Avenue, with its thriving shopping, dining and nightlife activities.

We are in the early stages of developing our second Dwell community near the Camelback Corridor in Phoenix, Arizona. This project includes the redevelopment of the northwestern portion of our Waterview Office property that we purchased in 2021.

In Summary

We are excited to introduce our two new product lines, Lanai and Dwell. We are hard at work developing the sites mentioned above with more communities to come in the future. We think that these new communities fill an important need in the market, while contributing to Holualoa’s 37-year track record of success

Lani Baker is a Principal Partner and Chief Financial Officer for Holualoa Companies an international commercial real estate asset management and development firm. Lani’s areas of expertise and responsibility include the planning, implementation, and management of the finance activities of the company, including, commercial real estate transactions, treasury, management reporting, and investor relations.Holualoa Companies is a real estate investment firm focused on the successful acquisition and repositioning of real estate assets. Holualoa also acquires core assets in superior locations and participates in select development opportunities. Holualoa actively seeks opportunities that improve neighborhoods, create jobs, and enhance communities. Headquartered in Tucson, Arizona, with offices in Phoenix, Los Angeles, Hawaii and Paris, France, its global investments include office, retail, industrial, multifamily, hotel and mixed-use properties. For more information visit www.holualoa.com.

Lanai Buckeye

Greenlight

Communities is a leader in addressing the growing market need for new high-quality attainable rental housing.

Cabana Bridges is Greenlight’s first attainable rental community in Tucson, at 1102 E. 36th Street. This community offers traditional key amenities such as a pool, a fitness center, and additional conveniences to Cabana communities, including a co-working lounge, lush multi-purpose event lawns, and EV charging stations. Cabana Bridges offers 288 units and is currently leasing, with its first move-ins set for September and rental rates starting at around $1,100 per month. Located in The Bridges masterplanned development and adjacent to the JTED’s newest technical education campus, Geico’s regional headquarters and U of A Tech Park, Cabana Bridges will be an integral part of a true live/work/play community.

The construction of the 196-unit Villa Cielo Cortaro, Greenlight’s second community in Tucson, is currently underway at 3100 W. Cortaro Farms Road, the northwest corner of Shannon and Cortaro Farms Roads. Anticipated for completion in the summer of 2024; it will also offer studio, one-bedroom, and twobedroom units, with rental prices starting around $1,300 per month.

Greenlight Communities has completed eight attainable apartment communities in Arizona, with 12 more communities under development and is looking to further expand into the Tucson market, where demand continues to outpace supply.

As water and land become more scarce, multifamily housing becomes a sensible environmentally and economically choice. It also revitalizes neighborhoods by attracting new customers to businesses. Opening new retail and restaurant spaces can be challenging in today’s Amazon-dominated and post-Covid landscape. However,

Cabana Bridges

Cabana Bridges

the presence of high-quality housing has proven to encourage the emergence of new stores and dining options.

Greenlight’s attainable housing model has been successful because it minimizes costs by using in-house contracting for all projects. This approach ensures control over expenses and timelines by closely monitoring each project. Greenlight’s efficiency in designing floor plans, unit layouts, and optimizing mechanical and electrical plumbing systems reduces build time.

Greenlight’s mission is to offer a solution to the growing need for privately funded housing for the “missing middle,” those making near Arizona’s median income. The vast majority of new multifamily rental home construction targets the top income brackets, and a small percentage addresses government-subsidized lower-income housing. Very few projects are built to accommodate median earners.

Two out of four renters in Arizona are moderately rent burdened, and one out of four renters are severely burdened. Those moderately rent-burdened spend more than 30 percent of their income on rent and utilities, while those severely rent-burdened spend more than 50 percent. Many rent burdened to some degree include teachers, first responders, and medical professionals.

Greenlight has constructed over 2,500 attainable rental homes to date and will have nearly 5,000 units constructed by the end of 2025 to help meet Arizona’s needs. The total development cost of Greenlight’s communities is approximately $1 billion.

Greenlight is proud to be part of the solution, but it takes more than just one builder.

New multifamily housing plays a critical role in addressing the Tucson area housing shortage as part of an overall effort that could

include adaptive reuse of existing structures, innovative housing solutions such as micro-units and prefabricated structures, and additional density in appropriate locations. Tucson is a progressive and innovative community that understands that zoning should reflect community needs and sustainable growth.

Cabana Bridges and Villa Cielo Cortaro are among the eight joint ventures Greenlight has undertaken with our valued partners, Holualoa Companies.

For more information on Greenlight Communities’ Cabana and Streamliner apartments, please visit www.livegreenlight.com or call (480) 609-6779.

Rob Lyles is a Co-Founder and Senior Partner of Greenlight Communities and, prior to that, Deco Communities. Mr. Lyles also co-founded Starpointe Communities in 1996, which sold over 3,500 homes, representing a total housing value of over $500 million.

Mr. Lyles is a member of the Urban Land Institute (ULI), and a supporter and advocate for numerous charitable organizations.

Villa Cielo Cortaro

Zoning tools spur mul.-family development in Tucson

In recent years, the concentra=on of mul=-family development in Tucson follows a clear paBernclustered around the streetcar and within our Downtown Infill Incen=ve District and other zoning overlays. These zoning tools have been a catalyst for mul=-family development, suppor=ng sustainable transit-oriented development paBerns and helping foster a more vibrant and walkable downtown.

Inrecent years, the concentration of multifamily development in Tucson follows a clear pattern - clustered around the streetcar and within our Downtown Infill Incentive District and other zoning overlays. These zoning tools have been a catalyst for multifamily

by Koren Manning

Downtown Infill Incentive District (IID) was established to encourage sustainable infill development, pedestrian-friendly and transit-oriented neighborhoods, and to protect historic and cultural amenities in the area around downtown and along the streetcar.

The IID is an optional overlay zone, which provides zoning flexibility and supports high-quality design in the greater downtown area. Projects that utilize the Infill Incentive District zoning option can take advantage of reduced parking requirements, flexibility with respect to setbacks and landscaping, and more generous maximum building height and density. This allows for more efficient site utilization and produces the urban style of development that supports transit usage and walkability.

Projects utilizing this option undergo a design review process to ensure the project meets design standards, which cover aspects such as building design, streetscape activation, open space, historic preservation, and sensitivity to surrounding scale and context.

The Infill Incentive District has facilitated the development of over 1,200 housing units, 253 of which (over 20%) are affordable. The district’s design standards have facilitated projects that enhance our downtown. The development due to the IID have strengthened downtown as a major activity center and brought greater transit ridership and street activity. A significant number of projects are multifamily, and the IID has also fostered new office, retail, and hotels, bringing a vibrant mix of activity that has made downtown a desirable place to live, work and play.

Significant multifamily projects in the IID include:

• The Flin, 245 units at Church and Broadway

• RendezVous, 100 units at Stone and Congress

• Marist on Cathedral Square, 75 units of affordable senior housing

• Union on 6th, 250 units with ground floor commercial at 4th Ave and 6th Street

Mul=-family units developed in Tucson in last 10 years (since 2013)

Multifamily Units Developed in Tucson in the Last 10 Years (Since 2013)

While the Infill Incen=ve District (IID) and other overlays cover a small por=on of the City mul=-family permits issued in the past 10 years are for projects within these districts, demonstra=ng how valuable these overlays are as a tool to support mul=-family development. The city’s urban overlays are designed to facilitate mixed-use urban development which can otherwise be challenging to develop using standard underlying zoning.

Infill

Incen4ve

While the Infill Incentive District (IID) and other overlays cover a small portion of the City, over half of the multifamily permits issued in the past ten years are for projects within these districts, demonstrating how valuable these overlays are as a tool to support multifamily development. The city’s urban overlays are designed to facilitate mixed-use urban development which can otherwise be challenging to develop using standard underlying zoning.

Urban Overlay Districts

Urban Overlay Districts

District has helped revitalize downtown with new housing, jobs and des4na4ons

Originally adopted by Mayor and Council in 2009, the Downtown Infill Incen=ve District (IID) was established to encourage sustainable infill development, pedestrian-friendly and transit-oriented neighborhoods, and to protect historic and cultural ameni=es in the area around downtown and along the streetcar.

Infill Incentive District Has Helped Revitalize Downtown with New Housing, Jobs and Destinations

Originally adopted by Mayor and Council in 2009, the

Like the IID, Urban Overlay Districts (UODs) allow flexible development standards and establish guidelines for a specific area. The goals of the UODs are to encourage comprehensively pedestrian, and transit-oriented urban infill and mixed-use areas. Three UODs have been Main Gate, Grant Road, and most recently, the Sunshine Mile on Broadway.

Like the IID, Urban Overlay Districts (UODs) allow flexible development standards and establish design guidelines for a specific area. The goals of the UODs are to encourage comprehensively planned, pedestrian, and transit-oriented urban infill and mixed-use areas. Three UODs have been established: Main Gate, Grant Road, and most recently, the Sunshine Mile on Broadway.

The Main Gate overlay district has produced nearly 1,000 units

The Main Gate overlay district has produced nearly 1,000 units near the UArizona campus streetcar. This district has been a major driver of mul=-family development in Tucson since in 2012

The IID is an op=onal overlay zone, which provides zoning flexibility and supports high- quality design in the greater downtown area. Projects that u=lize the Infill Incen=ve District zoning op=on can take advantage of reduced parking requirements, flexibility with respect to setbacks and landscaping, and more generous maximum building height and density. This allows for more efficient site u=liza=on and produces the urban style of development that supports transit usage and walkability

Union on 6th (photo credit: Amy Haskell)

City of Tucson – Trend Report submission September 2023

RendezVous Urban Flats, photo credit: Amy Haskell

Union on 6th, photo credit: Amy Haskell

near the UArizona campus and the streetcar. This district has been a major driver of multifamily development in Tucson since its adoption in 2012.

Milagro on Oracle is currently in development within the Grant Road overlay, an innovative public/private partnership that will deliver 63 affordable housing units for older adults. Milagro on Oracle is Tucson’s first Low Income Housing Tax Credit (LIHTC) project developed under El Pueblo Housing Development, a newly formed city nonprofit, and the city’s first LIHTC project in 10 years. This project utilized the Grant Road overlay to achieve greater building height, reduced parking, and other flexibility with site standards to make this project, which includes both adaptive reuse and new construction, possible.

Multifamily Across the City

Outside of overlays, multifamily development has been steady, but often requires larger sites and/or rezoning in order to achieve sufficient density and the required development standards. Notable recent projects include:

• The Benedictine, 255 units at the former monastery on N Country Club

• Cabana Bridges, 288 units on E 36th St and S Park Av

• Encantada Saguaro National, 312 units at Houghton and Drexel

What’s Next?

Overlays have effectively promoted multifamily and mixeduse development that supports greater housing supply, transit and mobility options, and sustainable growth patterns. As our City evolves, we continue to build on these tools. Initiatives are underway to:

• Incentivize Affordability The Sunshine Mile overlay included incentives for affordable housing, such as a density bonus and parking reduction. A recent update to the Infill Incentive District also added an affordable housing incentive to certain areas of the IID. We continue to seek tools to support greater housing affordability through zoning overlays, guided by policy adopted by Mayor and Council in the Housing Affordability Strategy for Tucson.

Tucson Airport on the southside.

• Scale Up Our tools Citywide We are currently exploring ways to allow zoning flexibility on transit corridors more broadly, as a way to support redevelopment of underutilized sites, and promote affordable housing development. This effort leans on lessons learned from our zoning overlays and aims to apply tools that have been successful more broadly across the city.

• Plan for the Next Decades The City is currently engaging our community on an update to our General Plan, Plan Tucson. This plan provides a roadmap for future growth, and the policies that get adopted in this plan will shape how Tucson develops over the coming decades. We need to hear goals and ideas from all corners of our community to create a plan that addresses community challenges and reflects our aspirations. Get involved at plantucson.tucsonaz.gov!

Urban Overlay Districts

• Expand to Additional Corridors Mayor and Council recently initiated an expansion of the Grant Road Urban Overlay, further east to Swan Rd (the overlay currently extends roughly from Oracle to N Park). Planning is underway for this new extent of the corridor. Additionally, planning is underway on Tucson Norte-Sur, a plan that will work with Tucson communities to identify opportunities for equitable reinvestment and access along a future 15-mile long NorthSouth High Capacity Transit (HCT) corridor connecting the Tucson Mall on the northside to downtown Tucson and to the

Like the IID, Urban Overlay Districts (UODs) allow flexible development standards and establish guidelines for a specific area. The goals of the UODs are to encourage comprehensively planned, pedestrian, and transit-oriented urban infill and mixed-use areas. Three UODs have been established: Main Gate, Grant Road, and most recently, the Sunshine Mile on Broadway.

The Main Gate overlay district has produced nearly 1,000 units near the UArizona campus streetcar. This district has been a major driver of mul=-family development in Tucson since in 2012

Koren Manning is the Deputy Director of Planning and Development Services with the City of Tucson. Before that, she served as the Planning Administrator for the City from 2018 to 2023. Koren is an experienced urban planner committed to making cities better and skilled in community engagement, project management, and collaborative planning. She leads a team of planners helping make Tucson a more sustainable, thriving desert city with opportunity for all. Former projects include leading the East New York Neighborhood Plan and rezoning, NYC’s first and largest neighborhood plan approved under the de Blasio administration to promote affordable housing, economic development, and more vital community resources. Koren can be reached at koren.manning@ tucsonaz.gov.

RendezVous Urban Flats, photo credit: Amy Haskell

Union on 6th, photo credit: Amy Haskell

Afterseveral years of building momentum and rapid growth, the single-family build-to-rent (BTR) national market faces mixed conditions in 2023. Despite a tighter financial environment making securing capital for new development more challenging, the longer-term outlook for BTR activity remains bright. This optimism stems from the growing popularity of the single-family rental (SFR) sector and favorable demographic trends that are expected to continue.

In 2023, the national economy has posted stronger-thanexpected performance, particularly in the labor market, which is a primary driver of new household formation and demand for all forms of housing, including SFRs. Businesses have continued to grow payrolls steadily, adding more than 1.5 million net new jobs yearly.

In addition to the labor market, conditions in the for-sale housing market are supporting continued demand for SFRs. Despite a favorable jobs market, transitioning from renting to owning is becoming increasingly restrictive, with elevated mortgage rates and a limited supply of existing and new-home inventory. The gap between owning and renting has widened in the past year, and homeownership rates reached their lowest levels in decades.

These forces are combining to form a perfect storm for SFR housing. The Millennial generation is doing well professionally, growing older, and looking for an alternative to traditional apartment living. Still, they also find it increasingly difficult to buy their own homes. SFRs combine a home’s larger unit size and privacy benefits while also including the amenities (pools, dog parks, and clubhouses) and professional management (ease of repair and maintenance) associated with renting.

This year is on pace to be a record-setting year for the delivery of new SFRs. Supply growth will likely outpace absorption, increasing the vacancy rate nationally and across most markets. Still, these supply-side pressures are expected to be short-lived. The number of BTR construction starts in 2023 is anticipated to decline by as much as 50% from 2022 levels due to a more restrictive capital environment.

It’s important to remember that the BTR market is linked to the economic climate and liquidity in the capital markets, which means the future isn’t set in stone. There will likely be fewer lenders and less capital in the space.

While a market boom shouldn’t be expected, BTRs now have the opportunity to prove their performance in a slower-growth economic climate and set a more gradual pace for construction completions.

Despite the current uncertainty, it’s clear that SFR housing will continue to appeal to many renters, developers, and operators. Though the market may face near-term challenges, the SFR sector has the potential to adapt and thrive in changing conditions, ensuring its continued significance in the housing market.

Peter O’Neil has been working as a Director of Research at NorthMarq for five years. NorthMarq is part of the Finance industry in Minnesota, United States. Established in 1962, NorthMarq Capital is one of the largest commercial real estate capital markets firms in the U.S., with more than 30 offices and more than 600 employees who carry on the legacy of providing the highestquality service to real estate investors, developers, and lenders for more than 60 years.

“This year is on pace to be a record-setting year for the delivery of new Single Family Rentals (SFRs). Supply growth will likely outpace absorption, increasing the vacancy rate nationally and across most markets.”

PICOR’s Thoughts

“The first half of 2023 saw the institutional market halt, leading to no sales of over 100 units in Tucson. The under-100-unit market saw a steady stream of sales occur as many long-time owners didn’t want to ride the uneasy wave of the market going forward. Demand saw a noticeable drop but still heavily outweighed supply. As other markets saw significant drops in value, the Tucson market for small/ mid-sized complexes remained relatively strong. Tucson’s rapid rental growth over the last four to five years still has many owners/ managers catching up to the new market rates. Rental appreciation has counteracted some of the typical value depreciation that we would see due to the substantially higher interest rates. The second half of 2023 shows a continued slowdown in inventory as many investors/owners are waiting and hoping for rates to come down from the current high.”

Allan Mendelsberg, PICOR Commercial Real Estate, amendelsberg@picor.com, 520-546-2721

“In a market and economy that seemed to be changing daily, the Tucson small to middle-sized apartment market remained strong in the first half of the year. PICOR Multi-Family facilitated nearly 75% of transactions sold over ten units in the first half of the year. Some warning signs have come out of the first half of the year as well, though, most notably the sharp increase in vacancy rate, going up nearly 27% from the end of Q2 2022. Rent growth has also started to show some flat-lining with a nominal (normal in most years pre-2018) 3.10% YoY rent growth compared to Q2 2022. To round it all out, we have seen interest rates continue to hike as the year has progressed. This has put upward pressure on cap rates, which we expect to continue to have to increase to meet investor return requirements. Transactions are getting tougher as the gap between seller expectation and buyer’s feasibility spread.”

Joey Martinez, PICOR Commercial Real Estate, jmartinez@picor.com, 520-546-2730

Lender’s Thoughts

“From a lender’s viewpoint, anticipated loan volume shrunk from the previous year’s production. Of 21 closed transactions, 13 were purchase money requests, demonstrating the strong demand for multifamily in the Tucson market. However, over this year, underwriting has become more challenging. As market-level expenses increased, vacancy rates/collection loss and continuing

interest rates hikes stressed our DSCR standards. The typical loanto-value ratio for new purchase requests fell between 60-65% and occasionally 70%. The increased activity in the bond market and an approximate 75 bps increase in the effective federal funds rate from Jan 3rd to July 11th, 2023, have directly impacted lending rates. We anticipate the remainder of 2023 to have steady loan production, both purchase request and refinance. Currently, we are quoting 3045 days to close for purchase requests and 60-plus days for refinance requests. While underwriting stresses have been more challenging, the fundamentals for Tucson multifamily are strong.”

Robert Motz, Pima Federal Credit Union, rmotz@pimafederal.org

, 520-202-0672

Appraiser’s Thoughts

“From an appraiser’s view, much fewer apartment and student housing deals are coming through the pipeline, including new purchases and refinances. We have noticed that lenders have been tightening their restrictions, and most deals are cash, seller-financed, or 1031 exchanges. Sellers are still in short supply, and they generally believe we are at or near the top of the market and point out that there are limited options to park their money if they decide to sell. It is important to note that there are currently 3,709 units under construction, 453 pending final approval, and 3,426 units in the planning stages. This will add a substantial inventory to the current supply. However, Tucson does continue to grow and attract new employers, such as American Battery Factory in Tucson, Shamrock Foods, and Amazon in Marana. According to Apartment Insights, the vacancy in metro Tucson is 8.09%, up 2.32% from last year. Over the long-term, we have a positive outlook on multi-family assets in the Tucson market and will continue to be a highly desirable asset.”

Ajay Madhvani, AM Valuation Services, ajaym1999@gmail.com,

520-441-9030

Manager’s Thoughts

“I believe the second half of the year will remain stable regarding the leasing volume. The substantial rent increases that happened during the covid era are no longer. We focus on tenant retention and minimal 2–5% increases as needed. The economy is uncertain right now, and that can always change the forecast of the rental market with rents going up or down. You may see longer-standing vacant units as you try to push rents from last year’s rents. Adjustments or promotions/concessions must be considered if they stand too long on the market. Renters have more inventory to choose from than they did a year ago. This gives the renter more time to choose where they will live. Ones that may have rented a house three years ago will now rent a 2–3-bedroom apartment/condo just because of the elevated rents during the hot market. It is also important that each manager focuses on the consumer/tenant experience, which will result in more retention and happy new tenants.”

Chris Meehan, Fort Lowell Realty, chris@flraz.com, 520-317-2922

» compiled by Allan Mendelsberg and Joey Martinez

Multifamily Q2 2023

8.09% Vacancy Rate 141 New Deliveries, units $1,182 Effective Rent, Per Unit

In the second quarter of 2023, the US economy continued to exhibit resilience, with favorable implications for commercial real estate. Year-over-year (YOY) median household income grew from $69,700 to $72,900, supporting consumer spending and retail sales. Real GDP was up 2.1%, indicating strength amid economic headwinds. Of significance, the consumer price index reflected 11 consecutive months of decreasing inflation, dropping from 8.6% to 4.0% YOY. In Tucson positive trends persisted, with median household income rising from 3.2% YOY. Nonfarm employment increased 1.5%, reflecting a stable, if not robust, job market. The unemployment rate declined from 3.7% to 3.4%, suggesting improved labor conditions.

3.4%

Unemployment Rate

$72.9K

Economic Indicators, Q2 2023 (Source: BLS, Census Bureau; apartmentinsights.com)

Tucson Economy:

In the second quarter of 2023, the US economy continued to Year-over-year (YOY) median household income grew from GDP was up 2.1%, indicating strength amid economic headwinds. months of decreasing inflation, dropping from 8.6% to 4.0% YOY. rising from 3.2% YOY. Nonfarm employment increased 1.5%, declined from 3.7% to 3.4%, suggesting improved labor conditions.

Market Overview:

Tucson Economy:

In the second quarter of 2023, the US economy continued to exhibit resilience, Year-over-year (YOY) median household income grew from $69,700 to GDP was up 2.1%, indicating strength amid economic headwinds. Of significance, months of decreasing inflation, dropping from 8.6% to 4.0% YOY. In Tucson rising from 3.2% YOY. Nonfarm employment increased 1.5%, reflecting declined from 3.7% to 3.4%, suggesting improved labor conditions.

Tucson’s average multifamily vacancy rate increased 0.60% market’s leasing activity slowed as the new year turned, but toward apartment rent without utilities increased $7 (0.61%) from Q4 transaction in the quarter, only two exceeded 40 units, which apartment market. The two properties sold for an average of Rents and Lease-up Duration:

Market Overview:

Tucson’s average multifamily vacancy rate increased 0.60% to 8.09% in market’s leasing activity slowed as the new year turned, but toward the apartment rent without utilities increased $7 (0.61%) from Q4 2022 to $1,164 transaction in the quarter, only two exceeded 40 units, which extended apartment market. The two properties sold for an average of $82,000 per

Rents and Lease-up Duration:

tenants doubling up with roommates or moving in with family and friends to save money. Apartment Insights reports on 15 submarkets, of which four recorded gross rents above $1,400/unit. From Q2 2022, Tucson’s average gross rent rose $23/month, a 1.98% increase. During the second quarter, gross rents increased in twelve submarkets, with a high of $41 in Tucson Mountain Foothills. The lowest average gross rent for Tucson was reported in the SouthCentral Tucson submarket at $972. Average gross rents fell in two submarkets, with the highest drop of $13 (-1.21%) occurring in the South Tucson/Airport submarket.

Tucson’s average multifamily vacancy rate increased 0.60% market’s leasing activity slowed as the new year turned, but apartment rent without utilities increased $7 (0.61%) from Q4 transaction in the quarter, only two exceeded 40 units, which apartment market. The two properties sold for an average of Rents and Lease-up Duration:

The first half of 2023 saw slower leasing than expected, but as favorably located buildings and those with inferior curb appeal doubling up with roommates or moving in with family and friends four recorded gross rents above $1,400/unit. From Q2 2022, second quarter, gross rents increased in twelve submarkets, rent for Tucson was reported in the South-Central Tucson submarket highest drop of $13 (-1.21%) occurring in the South Tucson/Airport Supply vs Demand:

The first half of 2023 saw slower leasing than expected, but as mid -year favorably located buildings and those with inferior curb appeal were hit doubling up with roommates or moving in with family and friends to save four recorded gross rents above $1,400/unit. From Q2 2022, Tucson’s average second quarter, gross rents increased in twelve submarkets, with a high rent for Tucson was reported in the South-Central Tucson submarket at highest drop of $13 (-1.21%) occurring in the South Tucson/Airport submarket.

Supply vs Demand

The first half of 2023 saw slower leasing than expected, but favorably located buildings and those with inferior curb appeal doubling up with roommates or moving in with family and friends four recorded gross rents above $1,400/unit. From Q2 2022, second quarter, gross rents increased in twelve submarkets, rent for Tucson was reported in the South-Central Tucson submarket highest drop of $13 (-1.21%) occurring in the South Tucson/Airport Supply vs Demand:

In the first half of 2023, zero transactions occurred for properties investors remain on the sidelines monitoring interest rates. Demand with pricing softening nationally. Demand still significantly outweighs adjustments have been tempered in Tucson relative to national 21 transactions from properties 10-100 units in Tucson for the

In the first half of 2023, zero transactions occurred for properties over 100 units. This trend is expected to continue as many owners and investors remain on the sidelines monitoring interest rates. Demand has softened as many investors have returned to their local market with pricing softening nationally. Demand still significantly outweighs supply as new inventory slowly reaches the market. Pricing adjustments have been tempered in Tucson relative to national averages due to low supply and a steady rental market. There were only 21 transactions from properties 10–100 units in Tucson for the first half of 2023.

Supply vs Demand:

In the first half of 2023, zero transactions occurred for properties over 100 investors remain on the sidelines monitoring interest rates. Demand has with pricing softening nationally. Demand still significantly outweighs supply adjustments have been tempered in Tucson relative to national averages 21 transactions from properties 10-100 units in Tucson for the first half of

In the first half of 2023, zero transactions occurred for properties investors remain on the sidelines monitoring interest rates. Demand with pricing softening nationally. Demand still significantly outweighs adjustments have been tempered in Tucson relative to national 21 transactions from properties 10-100 units in Tucson for the

but as mid -year approached, the pace picked up. Managers reported that less appeal were hit harder than their counterparts. This can be attribut ed to tenants friends to save money. Apartment Insights reports on 15 submarkets, o f which 2022, Tucson’s average gross rent rose $23/month, a 1.98% increase. Duri ng the submarkets, with a high of $41 in Tucson Mountain Foothills. The lowest avera ge gross Tucson submarket at $972. Average gross rents fell in two submarkets, with the Tucson/Airport submarket.

properties over 100 units. This trend is expected to continue as ma ny owners and rates. Demand has softened as many investors have returned to their loc al market significantly outweighs supply as new inventory slowly reaches the market. P ricing national averages due to low supply and a steady rental market. There we re only for the first half of 2023.

» continued from page 10

and Northwest Tucson posted vacancy rates

Summing

Market Statistics (*Submarket Marana excluded from report due to low inventory; Source: apartmentinsights.com)

Financing:

“From a lender’s viewpoint, anticipated loan volume shrunk from the previous year’s production. Out of 21 closed transactions, 13 were purchase money requests, demonstrating the strong demand for multifamily in the Tucson market. However, over the course of th is year, underwriting has become more challenging. As market level expenses increased, a rise in vacancy rates/collection loss, and continuing interest rates hikes stress our DSCR standards. Typical loan to value ratio for new purchase requests fell between 60-65% with an occasionally 70%. The increased activity in the bond market and an approximate 75 bps increase in the effective feder al funds rate from Jan 3rd to July 11th, 2023, have had a direct impact on lending rates. We anticipate the remainder of 2023 to have steady loan production, both purchase request, and refinance. Currently we are quoting 30 -45 days to close for purchase request, and 60 plus days for refinance requests. While underwriting stresses have been more challenging, the fundamentals for Tucson multifamily are strong.”

Robert Motz – Pima Federal Credit Union – rmotz@pimafederal.org – 520-202-0672

Outlook:

The first half of 2023 saw the institutional market come to a halt, leading to not one sale over 100 units in Tucson. The und er 100-unit market saw a steady stream of sales occur as many long -time owners did not want to ride the uneasy wave of the market. Demand dropped perceptibly but still heavily outweighed supply. As other markets saw significant declines in value, the Tucson marke t for small and mid-sized complexes remained relatively strong. Rent growth also started to experience some flat -lining with a nominal (normal in most years pre-2018) 3.10% YOY rent growth over Q2 2022. Along with continued interest rates hikes throughout the year, upward pressure on cap rates will continue to meet investor return requirements. Transactions are getting tougher as the gap between seller expectation and buyer’s feasibility spread.

Overall Vacancy & Effective Rent

Outlook

The first half of 2023 saw the institutional market come to a halt, leading to not one sale over 100 units in Tucson. The under 100-unit market saw a steady stream of sales occur as many longtime owners did not want to ride the uneasy wave of the market. Demand dropped perceptibly but still heavily outweighed supply. As other markets saw significant declines in value, the Tucson market for small and mid-sized complexes remained relatively strong. Rent growth also started to experience some flat-lining with a nominal (normal in most years pre-2018) 3.10% YOY rent growth over Q2 2022. Along with continued interest rates hikes throughout the year, upward pressure on cap rates will continue to meet investor return requirements. Transactions are getting tougher as the gap between seller expectation and buyer’s feasibility spread.

A CUSHMAN & WAKEFIELD RESEARCH PUBLICATION

Cushman & Wakefield (NYSE: CWK) is a leading global real estate services firm that delivers exceptional value for real estate occupiers and owners. Cushman & Wakefield is among the largest real estate services firms with approximately 50,000 employees in 400 offices and 60 countries. In 2020, the firm had revenue of $7.8 billion across core services of property, facilities and project management, leasing, capital markets, valuation and other services. To learn more, visit www.cushmanwakefield.com or follow @CushWake on Twitter.

ALLAN MENDELSBERG Multi-Family Team, Principal +1 520 546 2721 / amendelsberg@picor.com

JOEY MARTINEZ Multi-Family Team, Principal +1 520 546 2730 / jmartinez@picor.com

A CUSHMAN & WAKEFIELD RESEARCH PUBLICATION

©2022 Cushman & Wakefield. All rights reserved. The information contained within this report is gathered from multiple sources believed to be reliable. The information may contain errors or omissions and is presented without any warranty or representations as to its accuracy.

Cushman & Wakefield (NYSE: CWK) is a leading global real estate services firm that delivers exceptional value for real estate occupiers and owners. Cushman & Wakefield is among the largest real estate services firms with approximately 50,000 employees in 400 offices and 60 countries. In 2020, the firm had revenue of $7.8 billion across core services of property, facilities and project management, leasing, capital markets, valuation and other services. To learn more, visit www.cushmanwakefield.com or follow @CushWake on Twitter.

©2022 Cushman & Wakefield. All rights reserved. The information contained within this report is gathered from multiple sources believed to be reliable. The information may contain errors or omissions and is presented without any warranty or representations as to its accuracy.

Allan Mendelsberg joined Cushman & Wakefield | PICOR in October of 2009. Allan concentrates on multifamily investments but also helps clients with manufactured housing and triple net(NNN) investments. Allan’s clients range from small private investor to largeREITS. Allan continues to rank as one of Southern Arizona’s most active multifamily brokers. He can be reached at amendelsberg@picor.com

(I have requested this excel file so we don’t have to recreate it)

Allan Mendelsberg – you have his bio info.

Joey Martinez joined Cushman & Wakefield | PICOR’s multifamily brokerage team in October 2019. Martinez is a graduate of New Mexico State University with a major in marketing and a minor in the PGA of America Professional Golf Management Program. He can be reached at jmartinez@picor.com.

Allan Mendelsberg is clients with manufactured

Conrad Martinez joined Cushman & Wakefield | PICOR’s multifamily brokerage team in October 2019.

Martinez is a graduate of New Mexico State University with a major in marketing and a minor in the PGA

of America Professional Golf Management Program.

up statistics above. The average sold was 1986. On a monthly gross apartment quarter. This represents The rental market continues minimal rental growth high, with the limited housing opportunities 2017 in the broader region.

All sales information obtained from RED Comps, a division of Real Estate Daily News. Subscribe here!

Acacia Gardens Mobile Home Park—193 Spaces

5505 N Shannon Road, Tucson, AZ 85705 n Submarket: Central

Acacia Gardens is a 193-space, all-age, fully amenitized community with a clubhouse (1632sf), pool, asphalt streets, curbs, and sub-metered municipal water and sewer. Includes 47 parked-owned homes (POHs) offered at cost and five notes secured by homes in the community. The median manufactured year of the POH portfolio is 2016, with 33 homes in 2018 and newer. The community was 82% physically occupied, including 12 vacant POHs, ready to be occupied or sold, and 77% economically occupied. The seller purchased the property in May 2016 for $5,100,000. 7/20/2023

Buyer: AG Lamp Lighter MHC, LLC et al., an affiliate of Lamplighter MHC, LLC (El Cajon, CA), c/o Wayne Comfort, Manager

Seller: Santiago Acacia Gardens, LP, an affiliate of Santiago Communities (Santa Ana, CA) c/o Aimee Molsberry, Principal; Andrew Boespflug of TOK Commercial, Boise, ID and John Barnes of Colliers (Phoenix)

Academy of Mathematics and Science

1557 W Prince Road, Tucson, AZ 85705 n Submarket: Central

The property comprises two buildings, one at 22,680 SF and one at 2,128 SF, with off-street parking and a 1.64-acre fenced and gated lot. The buyer was a tenant in the building prior to the sale and will continue to occupy dba Academy of Math and Science as an owner—property sold at the appraised value. The seller acquired the property in September 2004 for $1,100,000. 7/31/2023

Buyer: Academy of Math & Science, Inc. (Tucson) c/o Tatyana Chayka, President

Seller: Tatanya & Edward Chayka (Tucson)

Multifamily Site Block 5 Monarch Community

NWC Clark Farms Blvd and Civic Center Drive, Marana, AZ 85653 n Submarket: Northwest

HSL the +/- 21 acres, known as Block 5 of the Monarch master-planned community in Marana. The parcel is located on Moore Road, fronting Interstate 10, and is contiguous to an additional 58-acre parcel HSL acquired in 2021 by HSL Properties has been extremely active in this area for the past few years, acquiring several parcels in and around the hub of new industrial and commercial activity. HSL will hold the parcel for future development. The Monarch master plan has been one of North Marana’s most anticipated new projects. In addition to this sale, the first phase of 550 lots will be fully shovel-ready in the Fall. The project is approximately 450 acres and will be planned and developed for various residential and commercial uses. 7/26/2023

Buyer: HSL Monarch Block 5, LLC, an affiliate of HSL Properties, Inc. (Tucson) c/o Omar Mireles, President

Seller: SBH Marana, LP, an affiliate of Sunbelt Holdings, Inc. (Scottsdale, AZ) c/o Sean T. Walters, Manager; Will White and John Carroll with Land Advisors Organization in Tucson

Two Bring’s Funeral Homes Sold

6910 E Broadway Blvd, Tucson, AZ 85710 n Submarket: East

Two Bring’s Funeral Homes sold in bulk. One at 3081 W Orange Grove sold for $1,319,916, and the other at 6910 E Broadway for $2,559,837, for $3,879,754. The Broadway property comprises two buildings, one at 6,625 SF and one at 4,264 SF, and a 1,175 SF SFR ($212.19/ SF). Orange Grove property is 4,800 SF ($274.98 / SF). 7/17/2023

Buyer: FIP Master Funding XVI, LLC, an affiliate of Fundamental Income Properties (Phoenix) c/o Matt Burbach, Member

Seller: FIP Master Funding XVI, LLC, an affiliate of Fundamental Income Properties (Phoenix) c/o Matt Burbach

Sale: $12,497,800

$64,766/space

Size: 193 spaces

Sale: $5,000,000 $201.55/SF Size: 24,808 SF

Sale: $4,454,772

$206,910/acre $4.75/SF

Size: 21.53 acres 937,847 SF

Sale: $3,879,754

$230.06/SF

Size: 16,864 SF

Fry’s Plaza: Grant & Alvernon Shopping Center

2330 N Alvernon Way, Tucson, AZ 85712 n Submarket: Northeast

The Grant & Alvernon Shopping Center has been sold at the southeast corner of Grant Road and Alvernon Way. The 25,365 SF shopping center was developed in 1985. Vasa Fitness building was not included in the sale. The shopping center was 73% occupied at the time of the sale. 7/24/2023.

Buyer: Bob Camino Principal, LLC (Tucson) c/o Bob Zhang; Bob Zang is also a broker of Bob Principal Realty and represented itself.

Seller: Grant & Alvernon Realty Trust (West Dennis, MA); Craig Finfrock of Commercial Retail Advisors in Tucson

ABB GE Industrial Repair—Industrial Warehouse

1401 E Valencia Road, Tucson, AZ 86706 n Submarket: South

The seller was an owner/user dba ABB GE Industrial Repair and sold in a sale-leaseback agreement. There are three buildings, one at 31,991 SF, one at 2,730 SF, and one at 1,208 SF, with a fenced and gated lot on 4.63 acres and numerous grade-level roll-up doors. The seller transferred property ownership in July 2018 for $1,688,663 in a non-arms-length transaction from General Electric, an affiliate. 7/3/2023

Buyer: Swiss Motor NCAZIN, LLC, an affiliate of CMRE Venture 1, LLC (Dallas, TX) c/o Christopher Miller, Principal

Seller: ABB, Inc., an affiliate of ABB GE Industrial Repair (Cary, NC) c/o David Onuscheck, SVP

Third Church of Christ Scientist

7355 N Paseo del Norte, Tucson, AZ 85704 n Submarket: Northwest

The 10,045-square-foot church was built in 2002 by the seller and sits on 4.5 acres northwest of Ina and Paseo Del Norte. The seller was an owner/user and the buyer will be the same dba Lifepoint Church, a local Christian Church currently located at 7330 N Oracle Road in Tucson. 7/26/2023

Buyer: LifePoint Church (Tucson) c/o Andy Tracy, Pastor

Seller: Third Church of Christ Scientist (Tucson) c/o Mary Baker Eddy, Pastor; Mara Judy Burghard of Keller Williams Southern Arizona in Tucson.

Studio One Apartments: 24 Units

1015 E 9th Street, Tucson, AZ 85719 n Submarket: Central

The property is a 24-unit apartment complex, all studios with full bathrooms, spacious closets, and a wall heating / AC unit. The two-story masonry construction was built in 1974, with a pool, laundry, and off-street parking two blocks south of the University. Property sold as part of a bulk sale with Park Avenue Apartments (20 units) for $1,684,000. 7/25/2023

Buyer: Studio One and 9th Fund III, LLC (Torrance, CA); Scott Michael Horchiss with Coldwell Banker

Residential Brokerage in Tucson

Seller: Bogutz & Gordon PC, Trustee (Tucson); Eliza Landon Dray with Tierra Antigua Realty in Tucson

New Headquarters for Big Brother Big Sisters

2552 N Alvernon Way, Tucson, AZ 85712 n Submarket: Northeast

Big Brothers Big Sisters of Southern Arizona (BBBS) closed on their new headquarters. The property consists of two buildings located at 2552 & 2562 N Alvernon Way in Tucson, on Alvernon north of Grant. Michael Franks originally built the building for Seaver Franks Architects, and it has been their home since its construction. Seaver Franks will continue occupying a portion of the building via leaseback. BBBS moved to central Tucson to serve their Bigs and Littles better and offer community space more conducive to Big and Little bonding activities. The seller paid $42,000 for the land in 1992. 7/28/2023

Buyer: Big Brothers Big Sister of Southern Arizona (Tucson) c/o Marie Logan, CEO; Isaac Figuerora with Larsen Baker of Tucson

Seller: Alvernon Investors Group, LLC and Alvernon Investors Group II, LLC an affiliate of Seaver Franks Architects, Inc. (Tucson) c/o Michael W Frans, Manager; Dean Cotlow of Cotlow Company in Tucson

Sale: $3,450,000

$136/SF

Size: 25,365 SF

Sale: $2,497,800 $69.52/SF

Size: 35,929 SF

Sale: $2,250,000

$223.99/SF

Size:

10,045 SF

Sale: $2,134,000

$88,916/unit

$262.10/SF

Size: 24 units

8,142 SF

Sale: $2,120,000

$189.49/SF

Size: 11,188 SF

Penske Truck Leasing Bought Land formerly Kazal Fire Protection

3499 E 34th Street, Tucson, AZ 85713 n Submarket: South

Penske Truck Leasing Co, L.P. purchased 1.48 acres of land at 3499 E. 34th St. in Tucson from JDK Aviation Property, LLC, to owner occupy. This will be the seventh location for Penske in Tucson. 7/12/2023

Buyer: Penske Truck Leasing Co, LP (Reading, PA); Robert Glaser, SIOR, CCIM. with Cushman & Wakefield | PICOR in Tucson

Seller: JDK Aviation Property, LLC (Tucson) c/o James Kazal

Office Building & Excess Land

319 W Simpson, Tucson, AZ 85701 n Submarket: Central

The property is a Coworker and event space dba La Suprema with excess land for a parking lot. Once a Chinese market and later a tortilla factory. The seller paid $400,000 in July 2021 for the property. 7/25/2023

Buyer: Thelma and Louise Development, LLC (Tucson) c/o Randi Dorman, Member

Seller: Adobe Historico Holdings, LLC, an affiliate of Catalina Adobe, LLC (Tucson) c/o Katina Koller, Manager

Park Avenue Apartments—20 Units

215 N Park Avenue, Tucson, AZ 85719 n Submarket: Central

Park Avenue Apartments is a 20-unit studio apartment with full bathrooms, spacious closets, and wall heating and A/C in a two-story masonry building, with a pool, laundry, and off-street parking. It is located a few blocks from the University. The property was part of a bulk sale with Studio One Apartments for $$2,134,000. The seller has owned the property since 1989. 7/25/2023

Buyer: N Park E 8th Fund III, LLC (Torrance, CA); Scott Michael Horchiss with Coldwell Banker Residential Brokerage in Tucson

Seller: Bogutz & Gordon PC, Trustee (Tucson); Eliza Landon Dray with Tierra Antigua Realty in Tucson

Multifamily—19 units

2620 N 14th Avenue, Tucson, AZ 85705 n Submarket: Central

The property has a unit mix of (11) 1BR/1BA, (4) 2BR/1BA, (2) 4BR/1BA, and (2) 4BR/2BA with an on-site laundry facility and sold with a proforma cap rate of 6.5%. The seller paid $712,130 in October 2003 for the property. 7/12/2023

Buyer: Wibu Rose, LLC (Henderson, NV) c/o Loren Diago Shinohara; Phillip Fileccia of Pinnacle Realty & Investment Advisors of Tucson

Seller: Daniel McGany (Pacific Palisades, CA); Phillip Fileccia of Pinnacle Realty & Investment Advisors of Tucson

National Boutique Grocery Store Site

2160 E Broadway Blvd, Tucson, AZ 85719 n Submarket: Central

The property is a former Dollar Tree store sold for land value to be razed for a nationally known boutique grocery at the corner of Broadway and Plumer. Local developer Marcel Dabdoub presented the plans to Rio Nuevo to acquire the entire block at the southwest corner and build a 10,000 sq. ft. high-end grocery store and retail outlet. Revenue forecasts for the new store approach $30 million annually, and the construction cost is projected at over $8 million. The investment would come in a $1.5 million cash investment when the store opens with a sales tax rebate capped at $3 million over the next ten years. The Rio Nuevo Board unanimously approved the investment of up to $4.5 million. The buyer plans to acquire the entire city block for this project. The seller paid $1,517,400 in November 2011 for the property. 7/5/2023

Buyer: 2120 Broadway, LLC, an affiliate of CID Holdings (Tucson) c/o Marcel Dabdoub; Jose Dabdoub and Andy Seleznov with Cushman & Wakefield | PICOR in Tucson

Seller: RKKI, LLC and A&L Properties, LLC (Los Angeles, CA) c/o Ms. Lucy Tse; Frank Arrotta with Larsen Baker in Tucson

Sale: $1,875,000

$1,132,189/ acre $25.99/SF

Size: 1.66 acres 72,139 SF

Sale: $1,750,000 $374.97/SF

Size: 4,667 SF

Sale:

Sale: $1,650,000 $48.23/SF

Size: 8,112 SF

Chart Title

Chart Title

Chart Title

Chart Title

source: Tucson Association of Realtors

Pima County Rental Activity All Property Types

Pima County Luxury Sales Activity

Source:

- 18.0% Change in Closed Sales All Properties

+ 3.0% Change in Median Sales Price All Properties

-26.7% Change in Homes for Sale All Properties

Affordability constraints have continued to limit homebuying activity this summer, with existing-home sales falling 3.3% month-over-month nationwide as of the last measure, according to the National Association of REALTORS® (NAR). Mortgage rates have approached 7% in recent months, leading many prospective buyers to temporarily put their home purchase plans on hold. But higher rates have kept many existing homeowners from listing their homes for fear of giving up the low-rate mortgages they locked in a few years ago when rates were significantly lower.

New Listings decreased 27.8 percent for Single Family and 39.5 percent for Townhouse/Condo. Pending Sales increased 2.9 percent for Single Family but decreased 12.3 percent for Townhouse/ Condo. Inventory decreased 24.9 percent for Single Family and 41.7 percent for Townhouse/Condo.

Median Sales Price increased 3.2 percent to $397,255 for Single Family and 14.8 percent to $287,000 for Townhouse/Condo. Days on Market increased 105.6 percent for Single Family and 100.0 percent for Townhouse/Condo. Months’ Supply of Inventory remained flat for Single Family but decreased 23.1 percent for Townhouse/Condo properties.

Despite a drop in existing-home sales, home prices have remained near record highs, with a national median sales price of $410,200 as of last measure, 0.9% below the all-time high of $413,800 recorded in June 2022, according to NAR. With only 3.1 months’ supply heading into July, the lack of inventory has boosted competition among buyers and put upward pressure on sales prices, especially in more affordable markets, where competition for homes remains particularly strong.

Monthly Rental Indicators

Rented Units increased 2.5 percent over last year to 247 units. Active Listings decreased 3.7 percent over last year to 607 units.

Rental Costs by Property Type:

• Single Family Residence was up 5.4 percent over last year to $2,042 per month.

• Townhouse was up 22.4 percent over last year to $1,629 per month.

• Condominium decreased 2.0 percent over last year to $1,419 per month.

• Casita/Guesthouse was up 30.8 percent over last year to $1,248 per month.

• Manufactured Single Family Residence average rental cost was $1,700 per month, for this period.

• There were no Mobile Home rentals during this period.

+2.5% One-Year Change in Rented Units All Properties

-3.7% One-Year Change in Active Listings All Properties

+8.8%

One-Year Change in Avg Rental Cost All Properties

Rental activity comprised of Single Family, Townhouse, Condo, Casita, Mobile and Manufactured Single Family properties in the MLS of Southern Arizona service area. Percent changes are calculated using rounded figures.

DISTINCTIVE NAME. DISTINCTIVE PROJECTS.

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Holualoa Companies is a real estate investment firm managing assets that span the United States and Europe. Holualoa invests strategically in office, retail, industrial, multifamily, hotel, and mixed-use properties. With a 35year track record of success, our skilled and ambitious management team produces steady results through unsteady markets by leveraging our talent and experience to serve our investors.

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Themultifamily sector in Arizona and Tucson continues to experience challenges that are likely to continue in 2024, among the issues: Ballooning population growth; a massive imbalance between housing supply and demand; the impact of exclusionary zoning practices; neighborhood “NIMBY” opposition to new development; and the increased cost of new construction created by cities and towns adding “bells and whistles” to new projects.

Let’s delve into those issues individually, addressing how they may impact the year ahead.

Recent Census statistics offer no reason to believe people will stop moving to Arizona anytime soon. Maricopa County again led the U.S. in numeric population growth, adding nearly 57,000 new residents last year. Pima County, meanwhile, grew by about 0.6 percent in a year. According to Census estimates, this equated to about 6,400 new residents in the metro Tucson region.

Research shared with the Arizona Multihousing Association by Connor Devereux, CoStar’s Director of Market Analytics, shows that during the so-called “Covid era,” measured from the final quarter of 2019 to the end of Q1 2023, Tucson ranked second in the U.S. for rent growth, behind only Tampa. With rent growth above 31 percent, Tucson outstripped Phoenix, which ranked 15th in the nation at 26 percent for the three years.

Tucson’s supply and demand trends for rental units have been erratic over the past two years. Net deliveries were strongly positive in 2021 before leveling off last year. Net absorption was negative for five consecutive quarters, according to the CoStar stats, before reaching a positive level at about plus-200 units in Q2 2023.

Here at the AMA—where we have communicated steadily about the Arizona housing supply crisis and the Arizona Department of Housing assessment that we must build 270,000 new homes to correct the supply/demand imbalance—these numbers represent a challenge heading into 2024. Guided by the leadership of Arizona Sen. Steve Kaiser—a Phoenix Republican who has since left the Legislature—the state Housing Supply Study Committee held more than a dozen sessions around the state, hearing from 70 stakeholders. This dialogue dramatized the need for action, with months of negotiation coalescing into three housing reform bills.

Kaiser’s SB1161 and SB1163 were lobbied to death by the state’s cities and towns. SB1161 would have required municipalities to assess their housing needs every five years. The bill also would have helped Arizonans in need of low-income affordable housing. SB1163 sought to speed up development and allow more homes per acre.

HB 2536, the third bill, would have legalized “missing middle” housing options and eliminated aesthetic design requirements. It was also killed. With Kaiser gone, it remains to be seen who will step up to lead when it comes to slashing red tape and fighting municipalities’ bias against new development.

One must for 2024? The industry must push ahead, fighting exclusionary zoning.

According to a May 2022 study by Arizona State University’s Morrison Institute for Public Policy, “Tucson zones 55% of its land for single-family use and only 12% for multifamily use.”

This dearth of appropriately zoned land is an issue in Tucson, as are excessive parking requirements—including for electric vehicles—which

» by Courtney Gilstrap LeVinus

increase costs and limit the space available for housing, making it harder to create affordable units. Market conditions also play a role, with developers telling us financing is increasingly harder to find for affordable housing.

Media reports cite the example of a student housing and commercial development proposed for East 6th Street and North Campbell Avenue. As the Tucson Agenda reported in mid-July, “The city council rejected the development at 6th and Campbell last year, as it didn’t include any affordable housing units. That hasn’t changed—the developer says he can’t get funding for a project with below-market-rate units.”

landlords would have to create across the state.

HB2115 was met with significant organizations arguing that the bill towns generally do not regulate

Such struggles will continue unless attention is paid to streamlining zoning laws and pushing back against inevitable neighborhood concerns against any and all new developments. One win at the legislative level over the past year was HB 2547, sponsored by Republican House Speaker Ben Toma and signed by Gov. Katie Hobbs, a Democrat. This new law requires cities and towns to consider a housing impact statement—including the cost impact on building or renting homes—before adopting or amending any ordinance related to zoning.

The bill ultimately died in the Senate What’s ahead in 2020?

Meanwhile, elected local leaders continue to squeeze developers by adding fees to projects without considering impacts to the bottom line and future rents. The Town of Marana in July updated its “public art policy” to force developers to fund “high-quality public art installations… throughout the Marana community.” Per the rules, “new construction of any multi-family development site consisting of 50 or more units” will be required to “contribute 1% of the building permit valuation to the Fund,” up to a maximum contribution of $150,000.

Marana is not alone in dunning Arizona builders to fund art. Similar fees exist in Scottsdale, Tempe, Oro Valley, Sedona, and Apache Junction.

“Council members had few questions about the updated policy,” the Marana News reported. The lack of questions about how tens of thousands of dollars in fees will impact the cost of rent and housing prices highlights a serious disconnect: Over and over; we see elected officials demand more housing at all price points, reduced rents, and more affordable housing. At the same time, their opposition to meaningful reforms—or to support new construction projects when neighbors present token opposition— has downstream implications on the housing supply and rent.

Now that the 2019 Legislative Session 2020 Legislative Session! Well, not formulating the AMA’s legislative Affordable housing may once again year, several bills were introduced income residents. From funding Housing Tax Credit, lawmakers affordable housing units. While lawmakers did appropriate creating an ongoing revenue source. Perhaps in 2020 the legislature

Courtney LeVinus is the President LeVinus has worked with the AMA the co-founder of Capitol Consulting, headquartered in Phoenix. Courtney

Righting the housing market imbalance in 2024 will require vision, leadership, and collaboration on problem-solving. The statewide conversation has increased in volume. Multiple stakeholders have engaged—yet we need action over the years ahead. We must build our way out of this crisis. If we fail, that 270,000 home deficit will grow even larger, and the cost of housing, driven by the law of supply and demand, will spiral even higher.

Courtney LeVinus is the President and CEO of Arizona Multihousing Association. For over 20 years, LeVinus has worked with the AMA leading their advocacy team at the federal, state and local levels as the co-founder of Capitol Consulting, LLC a public affairs and association management firm headquartered in Phoenix. Courtney can be reached at clevinus@azmultihousing.org

Inrecent years, the real estate landscape in Tucson, Arizona, has witnessed a remarkable transformation, driven by the growing trend of build-for-rent developments and other new era rental products. This market segment has gained significant traction due to many factors, including changing consumer preferences, the scarcity of suitable sites, and the proactive initiatives of key players. The dynamic between the lack of resale and new housing stock and the surge in Tucson’s median home price has played a pivotal role in driving consumers toward the rental market. As homeownership costs continue to climb, many potential homeowners are choosing to rent instead. This shift in consumer behavior has prompted developers to diversify their rental product offerings to cater to a wide range of preferences. As the demand for rental housing continues to surge, the mix of rental products in the market has emerged as a crucial solution, reshaping the housing market dynamics in the Tucson metro region. Land Advisors Organization in Tucson has been fortunate to have handled most of the transactions for each rental product type in the past 36 months, and we feel like we have had a front-row seat early in the process.

The Proactive Advantage: Securing the Future Today

In the Tucson market, where available sites with the proper zoning and utilities are scarce, proactively acquiring sites is the right strategy. Developers who take this strategic approach to site acquisition find themselves at the forefront of this transformative industry, positioning themselves for success despite scarcity and rising land prices. Developers like HSL Properties and Moderne Communities have demonstrated that seizing opportunities before

they become common knowledge is the key to staying ahead of the curve in Tucson. Their foresight in identifying and acquiring the better-located sites well in advance has proven to be a game-changer, enabling them to shape the multi-story and build-for-rent landscape according to their vision rather than being confined by available options.

Demand and Land Prices: A Perfect Storm

The blend of soaring demand, affordability challenges in the post-Covid era, and historically low supply of suitable sites have set the stage for a unique challenge in the Tucson market. The repercussions of this imbalance are evident in land prices. Just 24 months ago, comparable sales flirted around the $4–5 per square foot range. Today, those sites are commanding prices in the stratosphere of $9–10 per square foot. The land price inflation needs to show signs of letting up as the rental rates for the various products continue to support them. If you can find the right site in the right location with zoning, you need to lock it down quickly.

Rental Rates: Reflecting a Changing Landscape

Over the past 36 months, the rental rates in Tucson have been mirroring the evolving dynamics of the real estate landscape and have risen substantially. As the demand for rental properties increased, rental rates followed suit. The scarcity of available properties and the diversification of rental product offerings have given landlords the flexibility to command higher rents. Today, rental options encompass various choices, including single-story build-for-rent apartments and single-family detached homes available for rent. These offerings

Moderne Communities at Rocking K

cater to different demographics and lifestyle preferences, from young professionals seeking modern, amenity-rich apartments to families desiring the space and privacy of a detached home. This shift in rental rates indicates the growing prominence of rental properties within the housing market.

Scarcity of Suitable Sites: A Challenge to Overcome

One of the critical challenges facing the build-for-rent market in Tucson is the need for more available sites within the 15-20-

acre range that possess the necessary zoning and utility amenities. As the demand for build-for-rent communities grows, the need for appropriately sized and zoned parcels becomes increasingly pressing. However, with the way the table is set and the extreme difficulty in rezoning new properties, it doesn’t look like the supply of suitable sites will grow. This scarcity has intensified competition among developers seeking to secure these limited resources. With a shortage of land meeting the required criteria, developers must innovate and strategize to capitalize on the available opportunities.

Acquisition Hot Spots

Finding a site in the middle of Tucson or a strong infill location would be ideal. These are very rare. Some groups undertake rezoning efforts, but those can go on for years and rarely get approved. The rental builders target areas that are close to jobs and close to supporting retail for residents. Currently, the highest demand areas are north Marana due to all the new industrial activity and the Vail area because of new retail and the Vail School District. The builders also target areas that command the best rents. Marana and Vail, with all the employment, retail, and school districts, check those boxes.

Summary

In a world where scarcity and demand are playing a role that shapes the real estate story, the rental market in Tucson is no different. This has emerged as a new strategy of proactivity and forward-thinking. The land market is tight and even tighter for zoned land that has rental uses. The challenges posed by limited suitable sites, and the reality of soaring land prices, have only fueled the determination of developers and investors in the industry. The emergence of the different rental products is also a complete game changer to the Tucson land market and will increase demand for these limited parcels. As the rental product continues to gain prominence and carve a larger slice of the market pie, the future of Tucson’s real estate landscape is vibrant with innovation, adaptability, and the enduring allure of new types of residential living. Tucson has never had so many residential uses and product lines competing for better locations. Watching the chase for land over the next 36 months by both rental and “for sale” builders will be fascinating. With all this to work with, Tucson looks increasingly like it’s coming into its own.

Will White has led the Tucson office of Land Advisors Organization for over 20 years. Under his leadership, the Tucson office has been recognized as the leading land brokerage company in Tucson by volume for over a decade. Will specializes in the representation of the area’s top master-planned and residential communities. His work with southern Arizona’s homebuilders is well documented and the office has been responsible for Tucson’s most high-profile land transactions and assignments. He can be reached at wwhite@landadvisors.com

Ingeneral, these are my observations of the Tucson market:

Fewer apartment and student housing deals are coming through the pipeline, including new purchases and refinances. We have noticed that lenders have been tightening their restrictions, and most deals are cash, seller-financed, or 1031 exchanges. Cap rates have also started to increase with interest rates. Sellers are still in short supply, and they generally believe we are at or near the top of the market and point out that there are limited options to park their money if they decide to sell. There is a discrepancy between buyer and seller expectations. In the short term, we anticipate fewer deals for the second half 2023. It is important to note that there are currently 3,709 units under construction, 453 pending final approval, and 3,426 units in the planning stages. This will add substantial inventory to the current supply.

In summary, we have a long-term positive outlook for multi-family assets in the Tucson market, and they will continue to be highly desirable assets. We anticipate the added inventory to be absorbed quickly, especially given the more considerable housing shortage in the Tucson metro area.

However, Tucson does continue to grow and attract new employers, such as American Battery Factory in Tucson, Sion Power in Tucson, Shamrock Foods in Marana, and Amazon in Marana. There is also a need for more new single-family homes in the Tucson area. Potential headwinds include high construction and financing costs. However, the market does adjust and will likely get creative for reducing construction and financing costs, so we expect the market to adapt over the next 12 months. According to Apartment Insights, the vacancy rate in metro Tucson is 8.09%, up 2.32% from last year. Next, I will analyze how Tucson compares to similar cities, Albuquerque and El Paso.

In my recent article, “Tale of 3 Cities—Revisited 8-2023,” I compare the Tucson market to Albuquerque and El Paso. The Tucson market has the most apartment units of the three markets by a large margin. It is noted that the figures in the table and graph below are from CoStar Group, Inc., which differs significantly from Apartment Insights, which is more reliable, but does not cover Albuquerque or El Paso.

For consistency purposes, we analyzed the CoStar figures. Based on the figures in CoStar, Tucson could have the most units of the three markets for several reasons. Several factors can explain this. First, Tucson has the largest university of the three markets and the most extensive metro population of 1.04 million, versus 920K in Albuquerque and 870K in El Paso. Secondly, Tucson has the lowest median household income of the three markets at $48K, versus $56K in Albuquerque and $51K in El Paso. In the past, higher home prices in Tucson than in the other two markets could have spurred new apartment development to offer a lower-priced housing option, but this is currently not true.

According to Redfin, Tucson’s median home price is about $330K, versus $380K in Albuquerque and $300K in El Paso. In the past, rental rates in Tucson could have been higher than the other two cities, but this is currently not the case either. The average effective rent is $1,203 in Albuquerque, $1,015 in El Paso, and $1,137 in Tucson. Several new units are being constructed in Tucson and Albuquerque. El Paso also has the most significant military base of the three markets, with housing options on the base. This could be why El Paso has the fewest units and the fewest being constructed. Another variable to consider is that Tucson is closer to large Phoenix

and California developers than the other two markets, saving time and money for construction and shipping materials.

In summary, we have a long-term positive outlook for multifamily assets in the Tucson market, and they will continue to be highly desirable assets. We anticipate the added inventory to be absorbed quickly, especially given the more considerable housing shortage in the Tucson metro area.

Ajay S. Madhvani, MAI is owner of AM Valuation Services, PLLC in Tucson, Arizona. Ajay has experience throughout the State of Arizona, with primary experience in Southern Arizona and also the Navajo Nation. Ajay is a designated member of the Appraisal Institute (MAI) and is licensed as a Certified General Real Estate Appraiser in the States of Arizona, New Mexico, and Utah. Ajay has experience in apartments, student housing, vacant land, subdivisions, office buildings, retail buildings, service stations, industrial buildings, mobile home parks, self-storage facilities, business site leases, and special use properties. Ajay’s clients include private individuals, corporate organizations, banks, attorneys, and governmental agencies. Ajay has experience in preparation of reports for conventional lending, SBA, litigation work, eminent domain work, consultations and appraisal reviews. He can be reached at ajaym1999@ gmail.com or 520-441-9030

Commercialreal estate market conditions have been overwhelmingly driven by macroeconomic forces; namely, a tightening lending environment spurred by ever-rising interest rates and a series of bank collapses. Buyers and sellers have reached an extreme mismatch in wants and needs under present conditions, and commercial real estate as a whole has entered a drastically different climate.

The Federal Reserve has raised interest rates 11 times since last March, bringing rates to the highest levels in 22 years. These hikes have had a real impact on easing price pressures, but have also discouraged borrowing and slowed economic activity. Federal Reserve signaling indicates we may see one more rate hike this year, yet their stance remains noncommittal to preserve flexibility pending new economic releases.

Despite Federal Reserve wishes of an economic “soft landing,” warning signs exist in the economy. An inversion of the yield curve is one of the strongest indicators of a looming recession, and predates a recession by a little more than a year on average. We have existed in an inverted yield curve environment for over a year now, with the curve reaching its lowest point in over four decades. However, this doesn’t definitively predict a recession—as nothing does—and more recent economic data points indicate that recession likelihood is dropping. Still, the inversion provides a metaphorical loading of Chekhov’s gun and is reflected in financial institutions attitudes and strategies.

This environment has not been favorable to the multifamily market. Phoenix multifamily transaction volume dropped 85% in Q2 2023, compared to the same period last year. Obviously, this cannot be handwaived as a normal ebb and flow drop, despite recent historic volume. The multifamily market has been hampered by inflationary pressures, a weakened economy, and rising interest rates that have increased the cost of debt, limiting the options for many would-be buyers.

In this high-interest rate setting, assumable debt has become a more appealing choice for prospective buyers. Having the ability to acquire more favorable debt than what the market provides is appealing, but the entity assuming the debt must possess credentials equal to or superior to the current holder. The rock-bottom interest rates that were a staple of the market for more than the last decade will make this an appealing tactic until the Federal Reserve starts to drop interest rates again.

In spite of the woes, the fundamentals of the metro have proven resilient. Although rental rates were down 5% in July from where they were a year prior, one of the largest drops in the nation, rents are still up 34% over the last three years, and over the next five years we can expect to see an annualized 3–4% rent growth rate. Growth will be driven by a number of factors, including rampant business development and high in-migration.

Phoenix has seen numerous businesses commit to and commence construction of new industrial spaces in the surrounding metro. Driven by some of the biggest commitments in the last few years, Intel and TSMC who are investing $30 and $40 billion respectively, a litany of supporting companies have followed. Electric vehicles producers, semiconductor facilities, battery companies, and more are working to make Phoenix a “Silicon Desert.” Albeit there is hesitation in the

market, as some companies have hit roadblocks and had to scale down operations. TSMC has pushed back their opening from 2024 to 2025, citing a “lack of skilled workers.” While other tech companies, like Lucid and Intel, have undertaken layoffs as the economic climate has weakened.

Even in the current atmosphere, there will be plenty of jobs to accommodate the massive in-migration of people to Phoenix; and vice versa the migration of skilled workers will fill many of these tech-centric jobs. Since 2010, Phoenix has seen a net gain of nearly 70,000 people each year, passing the 5 million mark in 2022, but that number could be as high as 8 million by 2060. Housing this many new people will be a monumental task, and Phoenix will have to develop and maintain an impressive pipeline to do so.

Fortunately, Phoenix currently has one of the largest conduits in the nation. Per Yardi Matrix data, at the end of Q2 2023 Phoenix had 43,854 units under construction and 31,453 units in the planning stages.

Just off its total highs from the Q1 pipeline, Phoenix has put together a robust foundation to accommodate this new demand for housing. However, a higher baseline for material costs, coupled with labor shortages and stricter lending, could prove tricky in the coming years. The viability of many projects will be affected, thus we foresee a drop-off in new deliveries in 2024 and 2025. This will help curb recently rising vacancy rates, but the market will ultimately need to adjust to supply housing for the tens of thousands of additional people migrating to the metro each year.

The Federal Reserve has signaled that they will begin to cut rates in 2024, at which point we can expect a slow return to more familiar market conditions and increased deal volume. GDP growth and economic activity will pick up, and while uncertain, there are still well-founded reasons to expect a soft landing.

Although current market conditions could be considered less than optimal, the Phoenix metropolitan area holds several compelling reasons for optimism and few markets can rival Phoenix’s relatively bright fundamental outlook.

John Kobierowski is President and CEO of ABI firm headquartered in Phoenix, with offices

John Kobierowski is President and CEO of ABI Multifamily, a brokerage and advisory services firm headquartered in Phoenix, with offices in Tucson, San Diego, and Las Vegas. He can be reached at john. kobierowski@abimultifamily.com.

Phoenix MSA Multifamily Construction (50+)

Market Velocity and Transaction Volume

In the past few years, the multifamily sector in Tucson has experienced remarkable expansion, showcasing impressive growth in both 2021 and 2022. During these two years, the sales volume surpassed a staggering one billion dollars, encompassing 43 transactions in 2021 and 29 in 2022. This can be attributed to strong market fundamentals, slightly higher yields vs. primary markets, and attractive financing options with historic low-interest rates. In a previous report, we anticipated that multifamily transaction volume would slow as the market recalibrates in reaction to the Federal Reserve’s battle to tame down multi-decade high inflation with numerous rate hikes. As of August 2023, there have been zero transactions in the 80+ unit sector; however, we anticipate the market will witness ±8 multifamily transactions this year, with an estimated sales volume of ±$175 million dollars for this sector.

Experienced Tucson developers who have a deep understanding of market dynamics and substantial financial resources will persist in constructing exceptional properties, a tradition they have upheld for many years. These developers are keenly aware of Tucson’s enduring multifamily fundamentals and will continue to achieve outsized results in their development endeavors. Moreover, they will remain dedicated to their pipeline of projects, ensuring a steady stream of successful ventures well into 2025.

Occupancy + Rent Growth

Sales Trends (80+ Units Sector)

Development Pipeline + Supply & Demand

The Federal Reserve’s decision to raise interest rates has also impacted the development pipeline. Higher interest rates make borrowing more expensive for everyone, which has deterred some developers from initiating new construction projects. Currently, there are 22 projects, totaling 5,405 units, under construction.

Given the current state of the multifamily market, and the impact of Fed rate hikes, the economic forecast for this sector remains uncertain. Still, there should be no concern about oversupply and market saturation for the Tucson MSA. The ongoing urbanization trend, and the increasing number of millennials entering the rental market, suggest that demand for multifamily properties will remain strong for the long term. For example, many past investors thought downtown Tucson needed to be more saturated with new multifamily development. However, the downtown Tucson submarket is experiencing some of the highest occupancies in Tucson, with multiple communities at 98% to 100% and a waiting list.

Occupancy projections remain strong, ranging from 93.87% to 93.60%, with average rents increasing to $1,385. However, we have seen a slight shift in how aggressive owners and their respective management companies operate as competitive comps within their submarkets begin to offer short-term concessions. These projections appear realistic based on our experience underwriting and marketing assets and conversations with investors and management companies. We expect occupancy to remain in the mid-90s and rent growth to be at 3.00% year-over-year through 2025, with certain submarkets experiencing slightly higher rent growth. We continue to caution investors and management companies to focus on occupancy and resident retention before trying to achieve steep rental increases, resulting in limited turnover costs and fewer vacant units on the market for extended periods.

Occupancy + Rent Growth

Headwinds

Macroeconomic forces are currently placing upward pressure on expenses, primarily through increases to insurance and payroll,

» by Hamid Panahi and Clint Wadlund

and multifamily owners in the Tucson market are not immune, despite having far less significant insurance claims and a lower cost of living than many national markets. Additionally, investors with floating rates, or fixed rate loans coming due soon, will face challenges refinancing with favorable terms.

Conclusion

Given multiple generations’ changing demographics and lifestyle preferences, long-term prospects for Tucson multifamily remain promising. While the market may experience short-term fluctuations, the multifamily sector is well-positioned for continued growth in the coming years, albeit at a slightly more sustainable pace. It is crucial for investors and developers to carefully analyze market conditions and adapt their strategies to navigate temporary challenges if they are to capitalize on the opportunities presented at the micro-level.

Although uncertainties abound, we strive to be a reliable source of guidance for our clients. Considering the challenges posed by the macroeconomic landscape, we firmly believe that a renewed emphasis on an individual asset level is crucial. Owners who meticulously examine every aspect of their property’s operations and diligently work towards enhancing the physical attributes of their communities are likely to emerge even stronger as they navigate through the unknown.

* Please note that all data points and perspectives refer to market-rate multifamily communities with 80+ units

** Sources:

• Moody’s Analytics, 2023

• RealPage, 2023

• Yardi Matrix, 2023

• Institutional Property Advisors Research Services, 2023

Hamid Panahi started his career with Marcus & Millichap in 2004 as an intern. In 2005, Hamid earned the firm’s Sales Achievement Award and Top First Year Agent award for the Arizona offices. In 2013, he joined the DavidGebing group with a focus on Multifamily assets in Tucson and the surrounding tertiary markets. To date, he has closed over $3 billion in sales. With a thoughtful approach to the investment sales business that transcends the boundaries of a single transaction and taps into the human element of relationships, Hamid is a brokerage professional that evokes action by influence, with a low-profile approach and center of gravity that demands attention to clients’ objectives over self-service. Preparation for each assignment and Hamid’s forward-thinking ability, combined with evident problem-solving skills consistently produce outsized results and repeat business. He can be reached at hpanahi@ipausa.com

Clint Wadlund was born and raised in Tucson where he earned his Bachelor of Science from the University of Arizona. Prior to joining Institutional Property Advisors, Clint Wadlund was a Senior Director at Berkadia Real Estate Advisors and a perennial top-tier producer. Clint has brokered over 175 multifamily transactions for a combined sales total of more than $3.5 billion dollars and has been Tucson’s leader in transaction volume since 2013. Clint focuses on Tucson as his primary market and is also active in Phoenix, Albuquerque, and El Paso. He can be reached at cwadlund@ipausa.com

“Occupancy projections remain strong, ranging from 93.87% to 93.60%, with average rents increasing to $1,385...We expect occupancy to remain in the mid-90s and rent growth to be at 3.00% year-over-year through 2025, with certain submarkets experiencing slightly higher rent growth.”

Fed Rate Hikes (2022–2023) by Federal Open Market Committee Meeting Date

K. Prouty, B. Prouty, T. Prouty and T.Witz

Someof the most common questions I receive from borrowers today ask some form of “Is anyone actually providing competitive debt for multifamily” or “Who is actually closing loans in this market” and most commonly, “When are rates going to decrease?” Reading all the national headlines, it’s natural to assume that no loan money is available. Every prognosticator will tell you that “rates are going down in 6 months”, which is technically true if you forget that the headlines said the same thing six months ago. However, I can tell you that there actually is good news in that money has been available and will continue to be available going forward. Unfortunately, absent some unforeseen shock event I believe borrowers should be prepared for interest rates to remain elevated for the foreseeable future.

There is no disputing that lending markets are down significantly through Q2 2023. CBRE Research estimates total multifamily and commercial originations are down 52% YoY compared to 2022. Truthfully all lending sources are down significantly, but a key takeaway from CBRE data is that depository lenders are still leading the way in 2023 just as they did in 2022. Currently, bank lenders are still the top lending source, providing roughly 43% of all non-agency loans nationwide and increasing their market share slightly compared to Q1 2022. The perception may be that the banks have pulled back, and in our experience, most banks are much more selective this year, but ultimately banks and credit unions are still providing funding. In my experience when we present a loan opportunity to lenders, we may only get three quotes on a property that, in “normal” times, would get ten or more quotes from lenders. So, while there typically isn’t as much of a competitive market among interested lenders, ultimately, lending options are still available. Life insurance companies are still providing roughly 27% of all non-agency loans, focused primarily on lower-leverage multifamily and industrial. Debt funds and CMBS lenders struggle to gain market share in this higherrate environment.

Underwriting standards have changed for lenders, with the biggest takeaway being that LTV truthfully does not matter in this current environment for multifamily loans. Whereas lenders used to size perm loans to an LTV metric (usually between 70% and 80%), those loans are all sized to Debt Service Coverage Ratio metrics now that act as a loan constraint and reduce proceeds well below 70% anyways. Perm lenders are extremely cash-flow-driven now. The average LTV increased for multifamily perm loans to 61.5% in Q2. However, this is likely more of a result of increasing cap rates as DSCR remained flat at an average of 1.37x nationally. On bridge or value-add loans, lenders still are very sensitive to Loanto-Cost and typically don’t want to stretch above 70% or 75% LTC on senior loans. Most bridge loans today are being constrained by exit assumptions on their underwriting. Lenders will focus on underwriting an agency takeout loan after all renovations on shortterm loans, and with the elevated interest rates those exit metrics ultimately act as a constraint on loan proceeds as well. These same metrics have impacted construction loans, which currently end up falling between 60% and 65% of total project costs.

So when will interest rates decline and ease off some of the pressure the higher rates create throughout the market? The

answer is as soon as the Federal Reserve is content with inflation. While the first half of 2023 has included many incorrect guesses on when the Fed will start cutting interest rates, the Fed has telegraphed many times that they won’t back off interest rates until they are satisfied with inflation. CBRE Economists are optimistic that inflation will be below 3% by the end of 2023 or early 2024, which could give the Fed some room to decline rates in 2024 slowly.

CBRE’s house view is that the 10-year US Treasury will decrease slightly to 3.8% by year-end 2023, with a further decrease to 2.9% by year-end 2024. Most economists project that the Fed will start lowering rates at some point in 2024, although the consensus is that it may occur closer to the second half of 2024. Should that occur, the decreasing US Treasury rate and lender spreads remaining stable could lead to some perm loans ending up in the high 4% range by the end of 2024. However, CBRE does not project the 10-year UST to drop much below 3% for the next five years, so the historic low rates of 2020-2021 are not likely to return at any point in the near future.

As always, I always remind borrowers that everything is financeable. Lenders still have plenty of capital available for 2023, and most expect high allocations for 2024. Barring some unforeseen shock, interest rates are unlikely to decrease significantly soon.

Kevin Prouty, Brian Prouty, Tim Prouty, and Theresa Witz are members of the Tucson CBRE Debt and Structured Finance Group. They have represented insurance companies, banks and other lenders in Tucson and other Arizona and out-of-state markets for over 30 years. They can be reached at Kevin.prouty@ cbre.com, Brian.prouty@cbre. com, Theresa.witz@cbre.com, and Tim.prouty@cbre.com

“Total multifamily and commercial originations are down 52% YoY... a key takeaway is that depository lenders are still leading the way in 2023, just like they did in 2022.”

SouthernArizona’s multifamily construction market has remained robust through the first half of 2023. While new multifamily construction starts have dropped significantly in other markets, Southern Arizona has thus far been immune to this slowdown.

The high inflation that plagued the construction industry in 2021–2022 has eased this year. Although costs in some areas, including electrical and HVAC, continue to rise, other trades, such as framing and drywall, have seen a small correction. Overall, we have been able to hold prices on projects that were bid out at the end of last year.

Financing is now the biggest challenge facing the construction industry. As interest rates continue to rise, lenders are becoming more risk-averse. They are adding requirements on new projects, including reduced loan-to-value. These changes have made it more difficult to begin construction on projects, increasing the likelihood of last-minute project cancellations. For example, a developer told me last year that for every 0.1% interest rate increase, he had to generate an additional $300k in equity to build a 200-unit apartment project.

• Projects must be built to accommodate future battery storage systems.

• Energy monitoring of R-2 occupancies, which will require the addition of sub-meters.

• Demand response HVAC, water heaters, and lighting controls.

• Energy recovery ventilators in all apartments larger than 500 SF.

• Increased insulation and building tightness.

Including all these requirements in local building codes could add between $15k to $25k per apartment to the construction cost. If you are considering a new multi-family project, I strongly encourage you to submit plans prior to the adoption of the 2024 code.

Southern Arizona developers have been progressing with their projects despite our current challenges. As we advance, we anticipate that new starts will proceed slower through the remainder of the year and into 2024. Because projects typically last 18–24 months, many construction trades would not feel this slowdown until 2025 and 2026. We would expect a 5–10% correction in construction costs at that point.

The second biggest issue in the construction industry is the electrical trades. New federal tax credits for electric vehicles and solar panels have increased demand for electrical gear and components, creating a significant backlog—typically between 12 to 20 months. Builders rely on just three suppliers for electrical gear, and they all have first-in, first-out production requirements. This is causing construction delays as long as three to six months on most projects. Electrical-related problems may escalate next year if the proposed 2024 building codes, including the International Energy Conservation Code (IECC), are adopted by our local jurisdiction. As drafted, the 2024 code includes the following requirements:

• 75% of parking spaces must be EV charging-capable, and 20% must provide EV charging.

• Projects must allow for the installation of solar panels, which will require master metering, large distribution panels, and associated wiring.

Jim Tofel is Managing Member with Tofel Dent Construction, and has over 250 multifamily projects to his credit. Jim’s passion for providing housing opportunities for those less fortunate has propelled Tofel Dent Construction to being one of the leading affordable housing general contractors in Arizona and New Mexico. With Jim’s leadership in the large multifamily project categories, including high-density market rate, senior living and mixed-use projects, Tofel Dent Construction is proud to have completed many successful projects. He can be reached at jtofel@ tofeldent.com.

“The high inflation that plagued the construction industry in 2021–2022 has eased this year...Financing is now the biggest challenge...”

Tucson is a unique and special place. Nestled in the heart of the Sonoran Desert, the city is an urban homage to a history rich in Mexican and Native American Indigenous cultures, romanticized visions of the Wild West, and optimism toward the future in commerce and innovation. Together, the robust history, idealistic view of the future, and iconic landscape offer a deep well of inspiration and context that defines communities and drives creativity as we design the physical future of life in this complex desert ecosystem.

Amid the picturesque landscape of Tucson, a transformational force is at work—the Urban Infill Project (UIP). Beyond the mere provision of housing, UIP seeks to be a game-changer, fostering vibrant communities and ushering in a new era of architectural innovation. With a resolute commitment to community enrichment and industry empowerment, UIP’s regionally focused efforts resonate deeply within the City of Tucson and Pima County, where urban dynamics and visionary initiatives intertwine.

The next year, UIP aims to build 1,000 tiny houses—tucked into backyards and small, forgotten lots around the city. To achieve this, a local industry supporting infill housing must materialize. Constructing this many homes will not only contribute to the solution of rampant housing shortage but also has the potential to create wealth opportunities for many people. Success as a community means we succeed as a collective of individuals—and collaboration is at the heart of a healthy construction industry.

At the core of UIP’s mission lies an unwavering dedication to enhancing the fabric of community life in all its aspects. By reimagining urban spaces through the lenses of multigenerational living, community housing, and cluster development, UIP aims

to strengthen the social bonds that connect Tucson’s diverse populations. The embrace of a community-minded approach to housing in general and the creation of new housing propels Tucson forward into a more cohesive and harmonious future.

Together, we must consider the needs of upcoming generations and ask how we can nurture a community mindset that serves them well in the future. Flexibility is key. Our children and aging parents look to us for options that provide togetherness and support. In addition, when the building trades are suffering, there is an opportunity for people to enter the business of investing in our communities and thereby providing financial freedom to people long left out of the conversation. We are collectively on a search for opportunity: for the possibility of passive income, for a greater array of choices, and a more coherent, connected society.

By living in proximity to our families and neighbors, we can provide assistance in times of struggle, be more aware of each other’s circumstances, and work together to find solutions. Accessory Dwelling Units (ADUs) and small homes, built as a connecting fabric between single-family houses, are the perfect building typology to provide renewed vibrancy to our neighborhoods and the middle class. The Urban Infill Project was founded to offer support by fostering financial opportunity. We are focused on a new breed of investors and on teaching people how to create an economy around the communities we already live in.

There is much work to be done and plenty for everyone to do. The more we work together to create community, the stronger we all become. Valerie Lane and Lisa Bowers, founders of UIP, have 40 years of combined experience helping Tucsonans see their housing and construction visions come to life. Valerie is an Architect, Realtor,

by Valerie Lane and Lisa Bowers

and Educator, and Lisa is a Development Liaison, bridging the gap between private development and government processes. Coming together to create The Urban Infill Project, these dedicated women set out to ensure local community members will play a pivotal role in the evolution of Tucson’s housing industry.

The Urban Infill Project includes a Pre-Permitted Plan Library & Resource Center that embodies a commitment to efficiency and excellence. By furnishing a repository of pre-approved model plans, UIP accelerates projects and simplifies the complexities of the permitting process. In an industry where time is of the essence, UIP’s streamlined route to building permits for infill housing underscores its dedication to advancing the sector now while also bolstering community progress.

UIP harnesses a network of support that connects potential investors, infill developers, architects, local trades, builders, local municipalities, and homeowners. Amid the significant complexities of addressing the housing shortage, UIP has established a fast track to obtaining building permits. UIP’s vision is embedded in the ability to empower people to build wealth using their creative vision.

As the City of Tucson evolves, UIP is pioneering a new era centered around Accessory Dwelling Units (ADUs) and small-scale housing solutions. This venture ignites economic growth and fosters a vibrant ecosystem based on collaboration, benefiting all parties.

Lisa and Valerie have no doubts about the strength of the Tucson community, and this is the springboard of their newly founded partnership. Mindful, supportive collaboration is the only way to solve the current housing crisis.

The Urban Infill Project is a testament to the dedication to accessibility and knowledge dissemination, reflecting the commitment to efficiency and transparency. Tucson’s community can access resources that nurture informed decisions and foster collective growth through this portal. Visit https://www.infillproject. com/ to uncover how UIP redefines urban living and reimagines Tucson’s landscape.

Valerie Lane became a Registered Architect in Tucson firm specializing in small-scale in-fill housing, historic established in 2009. She has taught Structures, Building courses in the School of Architecture at the University Realtor’s License in 2020 to enhance her client service. development company, Valley Alley Community Development, contribute to the Tucson community meaningfully. The and desire to provide viable housing solutions to the

In 2001, Lisa acquired Metro Permit Express, and in Development (TED), creating a Metro Tucson area officials that has become known as the foremost expert Ordinances, and Design requirements for the private rebranded to form Sonoran Development Consultants in the industry. Lisa easily navigates permitting obstacles relationship between design teams and reviewing municipal provide the service of navigating processes for Developers municipalities with customer perspectives and guides the two worlds can find common ground on which to Valerie Lane became a Registered Architect in Tucson in 2015. She has run an Architecture firm specializing in small-scale in-fill housing, historic preservation, and community design, established in 2009. She has taught Structures, Building Technologies, and Construction courses in the School of Architecture at the University of Arizona since 2014. She obtained a Realtor’s License in 2020 to enhance her client service. Soon after, she opened a property development company, Valley Alley Community Development, to strengthen her ability to contribute to the Tucson community meaningfully. The Urban Infill Project continues her work and desire to provide viable housing solutions to the greater Tucson community.

Valerie Lane and Lisa Bowers established The Urban Infill Project in 2023 in response to the need for supplementary housing solutions in Tucson and surrounding Southern Arizona Communities. They both have based careers in Tucson, facilitating growth and construction, and are passionate about the needs of their communities. They have come together with an explicit mission and have all the tools needed to provide clarity and ease in building opportunity through housing.

Valerie became a Registered Architect in Tucson in 2015. She has run an Architecture firm specializing in small-scale in-fill housing, historic preservation, and community design, established in 2009. She has taught Structures, Building Technologies, and Construction courses in the School of Architecture at the University of Arizona since 2014. She obtained a Realtor’s License in 2020 to enhance her client service. Soon after, she opened a property development company, Valley Alley Community Development, to strengthen her ability to contribute to the Tucson community meaningfully. The Urban Infill Project continues her work and desire to provide viable housing solutions to the greater Tucson community. Valerie can be reached at Valerie@infillproject.com.

In 2001, Lisa acquired Metro Permit Express, and in 2013 formed Tucson Expediting & Development (TED), creating a Metro Tucson area bridge between clients and municipal officials that has become known as the foremost expert in navigating various Building Codes, Ordinances, and Design requirements for the private development community. In 2022 Lisa rebranded to form Sonoran Development Consultants and is a household name and necessity in the industry. Lisa easily navigates permitting obstacles and orchestrates a cohesive relationship between design teams and reviewing municipal agencies. Not only does she provide the service of navigating processes for Developers, but she also provides local municipalities with customer perspectives and guides them in their internal processes so that the two worlds can find common ground on which to work.

In 2001, Lisa Bowers acquired Metro Permit Express, and in 2013 formed Tucson Expediting & Development (TED), creating a Metro Tucson area bridge between clients and municipal officials that has become known as the foremost expert in navigating various Building Codes, Ordinances, and Design requirements for the private development community. In 2022 Lisa rebranded to form Sonoran Development Consultants and is a household name and necessity in the industry. Lisa easily navigates permitting obstacles and orchestrates a cohesive relationship between design teams and reviewing municipal agencies. Not only does she provide the service of navigating processes for Developers, but she also provides local municipalities with customer perspectives and guides them in their internal processes so that the two worlds can find common ground on which to work. Lisa can be reached at Lisa@infillproject.com.

2023

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CCIM Southern Arizona September Meeting | September 12, 11:30am–1pm | DoubleTree by Hilton Reid Park Daniela Gallagher, Vice President of Economic Development at Sun Corridor Inc. will present “Promoting Southern Arizona to the World” at the monthly lunch meeting. More information and reservations here.

CCIM Southern Arizona Continuing Education Credit Course

| September 12, 1:30am–4:30pm | DoubleTree by Hilton Reid Park Instructor Nick Miner CCIM will present “Introduction to Commercial Real Estate.” More information and reservations here

TAR Expo | September 14, 10am–3pm | Tucson Convention Center

The TAR Expo is bringing together the best in real estate and more, offering a day of networking, learning and growth. This year’s keynote speaker will be Burton Kelso a tech expert, TV personality, and entrepreneur. More information and sponsorship opportunities here.

CCIM Southern Arizona Happy Hour at The Shanty | September 21, 5pm | 401 East 9th Street Meet your colleagues for drinks and networking! Register here

IREM Tucson September Networking Luncheon | September 27, 11:30am–1pm | Culinary Dropout Guest Speaker Bry Carter, VP Sales and National Direct Hire Recruiter from The Phoenix Staffing will present “Got Conflict?” More information and registration here.

SAVE THE DATE PCRERC’s 4th Quarterly Meeting will be held on November 16. More information soon!

REMEMBER to check out upcoming events of interest to the southern Arizona real estate and business community on the TREND report’s website. If you would like to promote your organization’s event on our site, email us at TrendReportAZ@outlook.com with details!

report’s founding sponsors:

report’s advisors:

Steve Cole , Southwest Appraisal Associates • Michael Guymon , Tucson Metro Chamber

George Hammond , Eller Economic and Business Research Center

Paul Kraft , The Clover Company • Larry Kreis , Red Point Development

J ane McCollum , Marshall Foundation/Main Gate Square

Linda Morales , The Planning Center

• Michael Racy , Racy Associates

Barbi Reuter , Cushman & Wakefield/PICOR

Mark Taylor , Westland Resources

• Linda Welter , Caliber Group

Lucinda Smedley Founder and Professional Advisor to TREND report

Trend report is a proud supporter of these local organizations: CREW Tucson, Downtown Tucson Partnership, Metropolitan Pima Alliance, Pima County Real Estate Research Council, Tohono Chul Park Nature Preserve, Tucson Airport Authority, Tucson Association of Realtors, SAHBA, CCIM Southern Arizona Chapter, Southern Arizona Economic Development Group