Phoenix-Area Apartment Complex Sells at Discount To Recent Highs

Article originally posted on CoStar on April 19, 2024

A privately owned real estate firm in California has purchased a Phoenix-area luxury multifamily project at a 25% discount from recent market highs as the area struggles with the fallout from overbuilding, including falling rents and rising vacancy rates.

Decron Properties acquired the Hangar at Thunderbird from its developer, P.B. Bell, as part of a 1031 exchange for $69 million. In a 1031 exchange, named for a section of U.S. tax code, the seller of a property can defer paying capital gains taxes by quickly reinvesting in other real estate.

With 266 units, the purchase equates to a price of $260,000 per door, more than 25% below the $350,000 per door cost averaged in 2021 and 2022 when the market was at its peak, according to Decron.

“Hangar was an opportunity to acquire Class A property in a submarket with an attractive demographic base and strong renter pool at a price well below replacement,” David Nagel, Decron’s CEO, said in a statement. “And with only one apartment community under construction within a 3-mile radius and with the current rent structure at Hangar below market, we believe the property offers substantial opportunity for growth, and feel it is a tremendous addition to our local portfolio.”

Decron’s purchase follows the sale of two properties in Ventura County, California, as the company attempts to geographically diversify its multifamily portfolio with newer assets not subject to city or state rent control regulations.

Located at 15301 N. 57th Ave. in Glendale, Arizona, Hangar at Thunderbird is a garden-style complex consisting of one-, two-, and three-bedroom layouts ranging from 679 to 1,338 square feet spread across 19 low-rise buildings on a 20-acre lot. The complex, situated near Arizona Christian University and the Interstate 17 employment corridor, was hailed by its developer as a “premier apartment community” that offered tenants “a cozy elevated living experience” when it opened to leasing in December 2022.

“The West Valley is booming, and housing remains in high demand,” R. Chapin Bell, P.B. Bell’s CEO, said at the time.

But in the nearly 16 months since, the Hangar at Thunderbird has struggled to fill its units. Vacancy rates at the property currently register at more than 13%, nearly 500 basis points above the area’s vacancy rate for similar apartments, according to CoStar data. Meanwhile rent declines at the property have been relatively minor, falling 1.1% over the past year compared to a 4.4% decline for similar apartments nearby.

Much of the vacancy and rent issues facing the area stem from a surge of pandemic-era development. Over the past three years, the Deer Valley area has added 2,800 new units amounting to an 8.8% expansion in inventory, according to a CoStar analysis. By comparison, between 2010 and 2019, Deer Valley saw at total of 3,200 new units come to market.

Still, Nagel said he feels “extremely confident in Hangar’s long-term upside” as the number of new openings has been limited as of late. According to CoStar data, there have been zero new units that came to market over the past four quarters, although analysts expect another 450 units to open before the end of the year. Across the Phoenix metropolitan area, new openings remain at elevated levels but are expected to decline quarter by quarter for the foreseeable future.

The Hangar at Thunderbird is the 10th purchase for Decron in Arizona over the past three years and brings its total unit count in the state to roughly 2,500. Since 2018, the company has invested more than $1.1 billion in real estate assets, mostly in Arizona and Washington state.

Representatives from P.B. Bell were not immediately available for comment.