October 29, 2024

Operating Conditions Level Off as Multifamily Deliveries Accelerate

Q3 2024

Multifamily property fundamentals stabilized during the third quarter in Tucson although the market is still being impacted by an accelerating pace of new construction. Developers delivered more than 1,400 units in just the past three months, bringing total completions in 2024 to nearly 1,800 units. This comes after approximately 2,000 units were delivered in 2023. Development has been scattered primarily in the outer submarkets in the Tucson area, including Northwest Tucson and the Tucson Mountain Foothills in 2024. In prior years, the South Tucson/Airport, University, and Southeast Tucson submarkets were the most active locations for new development. The influx of new supply has resulted in rising vacancy rates among Class A properties, where vacancy has averaged nearly 10 percent since the beginning of last year. Vacancy levels in Class B properties have been much steadier, ranging between 7.5 percent and 8.5 percent for the past eight quarters.

Sales transactions in the Tucson multifamily market in 2024 have occurred at a slightly faster pace than in 2023, but investment volumes remain well below long-term averages. Overall transaction activity has been limited and concentrated within the Casas Adobes submarket in recent quarters. Sales in Casas Adobes typically account for around 10 percent of all transactions in Tucson, but they have surged to approximately half of the total transaction volume in Tucson since the start of 2024. At $181,200 per unit, pricing in this submarket is also above average for the region. In the handful of transactions that have closed throughout Tucson to this point in 2024, prices have pushed higher. The median price has reached $146,200 per unit, 17 percent higher than in 2023.

Looking ahead

The Tucson multifamily market is on pace to post its highest volume of new construction in more than 30 years in 2024, following a year of heightened deliveries in 2023. The volume of new units will impact operating fundamentals, with vacancies likely to inch higher and rents expected to be fairly flat in the coming quarter. While supply growth is elevated, the market is posting improving renter demand. Year to date, absorption has totaled more than 1,100 units, similar to peak levels recorded in 2020 and 2021. With construction totals expected to remain elevated in the coming year, the market will need to sustain strong volumes of absorption to keep vacancy near its current levels.

Investment activity has inched higher to this point in 2024, but it will likely take a few more quarters before sales velocity rebounds fully. Many investors are taking a cautious approach to potential acquisitions, choosing to monitor lease-up volumes and market rents during this period of elevated supply growth. Ultimately, the transaction market will resume when Class B and Class C properties begin to change hands again. During the past decade, Class C properties have accounted for more than half of the properties that have sold, with a steady volume of assets priced between $5 million and $10 million. This this point in 2024, these sales have been limited, dragging on total transaction counts. As the market stabilizes, these types of transactions should resume, buoying the local investment market.