CoStar Market Insights: Phoenix Multifamily Sales See Shift to Value-Add Plays

Article originally posted on CoStar on June 7, 2017

Introducing CoStar Market Insights: a new feature providing a snapshot of recent real estate trends in your market. The CoStar Market Analytics team monitors commercial and multifamily real estate across 206 metro areas, with a granular understanding of the projects, players and economic trends that move these markets.

Phoenix Multifamily Sales See Shift to Value-Add Plays

The apartment sector continues to attract elevated levels of investment in Phoenix. Transaction volume for multifamily property in Phoenix is at historic highs — total sales topped $5 billion last year — and pricing continues to trend upward.

While sales of high-end multifamily properties typically account for at least half of the annual transaction volume, mid-quality 3 Star apartment properties have captured the most investment through the first five months of this year.

This investment shift to value-add activity has corresponded with larger price increases in the middle segment of the market in recent quarters, and a steady decline in the pricing premium commanded by 4 and 5 Star assets. As of May, 4 and 5 Star multifamily properties were trading at roughly an 87% premium over 3 Star assets in Phoenix, a significant drop from the price premium observed in the years immediately following the recession when 4 and 5 properties traded at prices that were 200% higher than those for 3 Star properties.

Recent Value-Add Trades

The value-add activity that is driving much of the price increases seen across 3 Star assets is happening all over the Phoenix market, although many of the largest transactions have been in the East Valley where investors have been repositioning older assets to better compete with new supply coming on line.

While multifamily property values across asset classes are above prerecession levels in most submarkets, there are a handful where prices are still below those observed at the peak of last cycle, including Chandler/Gilbert and East Mesa in the East Valley.

Recent examples of value-add trades include the sales of the Palm Trails community in Chandler and the Standard Apartment Homes complex in Tempe.

Capital Real Estate acquired the 175-unit Palm Trails community from Stratford Partners for $28.75 million ($143,000/unit) in March. At the time of the transaction, Capital Real Estate indicated plans to upgrade interiors at an estimated cost of approximately $6,000 per unit, with the expectation of being able to push rents by $75 per month once the renovations were completed.

In Tempe, Fowler Property Acquisitions sold the 228-unit Standard Apartment Homes community on Hardy Drive to 29th Street Capital for $20.35 million ($89,250/unit) in January. At the time of sale, the buyer reported a $1.8 million budget for value-add expenditures.

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