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Thank you for joining us, everyone. I am Tarja Panfil. The director of West USA Commercial division. West USA is one of the largest real estate companies here in Arizona. And our commercial division has grown significantly in the past few years. We currently have 39 full time, experienced commercial agents that specialize in all CRE market sectors, including retail, office, industrial, land, multifamily and business brokerage. Today’s presentation is given by one of our multifamily market professionals, Jim Kasten who, together with his previous team, brokered more than 1200 apartment communities in excess of $1 billion in value over the past 22 years. He is known for his extensive market research and has been providing a quarterly Metro Phoenix Apartment Owners Newsletter since 1998. Jim has gone to give us a multifamily market update and also go over what is driving this market today and what to expect in 2021, especially with the new administration. Jim, please go ahead and start your presentation. Thank you.
Jim Kasten:
Okay. So Tarja, again, thank you for the presentation or the introduction and Chris and I, and a few of my other team have joined West USA this past year after I shut down Kasten Long Commercial Group. This is an overview of the Metro Phoenix apartment market. And if you have questions, go through your chat and the chat will go into Jill and then she’ll get my attention. She’ll ask the question so everybody can see the question. So hopefully everybody can see the slide. Am I sharing my slides? Let’s see why this works. Click here. This is a little bit about me. You don’t need to know that anymore. Here’s the presentation outline. We’re going to start with new apartment construction, go through some odds and ends and then give some forecasts of what I think the housing market, how that will impact the apartment market and some of the things that might be critical for an agent working with both buyers and sellers.
And if you’re an owner, these are the kinds of things that you should look for an agent to provide. Okay. New apartment construction. If you’ve driven around any place in the city, you see lots of sticks going up. I mean, they’re just everywhere. The construction has been massive. Last year, actually 2019 is little chart on the right, we had 9,000-ish new apartments created. Last year, we were a little less than that. We were on track to do another couple of 1000 more than 2019 but with COVID, things just slowed down. On the right side of that graph you’ll see that we’re also at a vacancy of 4.5%. So, that’s the lowest in a long, long time, probably in my recorded history. And we’re going to talk more about vacancy here in a little bit. And you’ll see where I referenced the data, either CoStar or Yardi.
If it’s going to be Yardi, it’ll be 50 plus units. So last year, again, 42 projects completed, 8,817 units. In 2021, so this year, there’s 84 projects currently under construction projected to be completed this year. So almost double that. We’ll come back and reflect on those numbers in a second. So the total number of units currently under construction, 26,000. There’s 27 planned, which we’ll probably go then into construction. And then we have 17,000-ish perspective. Perspective is they’ve made initial application, they’re looking at it. They’re deciding if it’s feasible. Normally under construction plan the perspective are about equal numbers. So it’s interesting that for the perspective it’s dropped off 10,000-ish and that may be because the economy across the United States is a little less strong than it has been in previous years due probably, mostly to the COVID.
The new apartment construction. When we started to get to the increase, four or five years ago, it was mainly Phoenix, Mesa, Chandler, Gilbert, Tempe. Still the case. In fact, almost half of the units being constructed are in Phoenix and primarily that’s because Phoenix is the greatest land size. We’re about 500 square miles in Phoenix. The next closest city-wise is probably Mesa with a 107,000 square miles. But what’s interesting, and you look at this chart here, a lot of the new construction, both planned and under construction is now in the suburbs. And that’s a change over the last few years. So it’s showing that you can take good quality apartments, put them out in the suburbs where maybe it’s not quite as high dollar and still make good money. So occupancy. So we talked about 4.5% vacancy, which equates to 95.5% occupancy.
Essentially what that means, if you talk to any property manager, when you turn a unit, when a tenant leaves and then a new tenant comes in, there’s a time for the old to move out, go through checklists for move out for the apartment company to renew the unit, clean it up, get it ready. And so there’s three or four days in there. That’s really the vacancy that you’re seeing. So we’re really running a 100% occupancy and most apartment complexes have a waiting list for people already.
Rent growth. Amazing. Rent growth has translated into massive value increases as well. In quarter two, we slipped a little in rent growth across the entire United States. In quarter three, we started to rebound and the difference between quarter three and quarter four, we went up 2.7% in one quarter. The normal average that we’re getting is five to six, 7% increase annually. And even with last year, we were at annual increase of 6%. And it’s amazing. And our rents are still less than the surrounding area. Just to give you an idea how we look for across the United States, where does a little less in rent growth than a few places. Typically, the Inland Empire and Sacramento beats us out all the time, but we are in the top three or four all the time for rent growth.
So what’s driving the market. For apartments you need people to live in apartments. So population is driving our growth, our demand, our rental increases and our strong occupancy. Jobs, diversified economy, climate – 365 days, you can see this stuff. We also have power, water, IT, an educated workforce to sustain our growth. And that’s somewhat the educated workforce has maybe attributable to Michael Crow, who is the president of ASU, who has worked hand in hand with the industry to create, now, huge engineering divisions and things, an education funnel for companies needing people as they move into our area.
So, population. Depends on who you look at, what resources. I picked up one that says we’re at 4.7 million people. And on the last five years, that’s 2.3% per year, or about 93,000 people coming into the Metro Phoenix area per year.
Remember that number, 93,000. So there’s been a concern, and this is typical in the cycle of real estate, to have an overbuilding. So if you follow my math, I’ll try to do this simple, on the average we have about 30% of our population that lives in apartments, 25, 35%, depending on which city you’re in. We’re at about 30, maybe 33%. We’ll use 30 for a good number. If you take the 93,000 that comes in per year, times 30%, it’s 27,000 people are going to live in apartments. Generally, again this is rough average, maybe two people per apartment. So divide the 27,000 by two. You come up with roughly 14,000 units needed per year. So down below, you’ll see in 2019, we had 9,000 and last year we had 8,800. The projected, the ones that are projected to be completed this year are 16,000. So hopefully we will get a dent into the huge demand.
And that may cause the rents to decrease a bit because of more competition. And the other thing that you need to keep aware of is we’re not building any B and C properties, we’re building class A stuff. So there’s still a lot of folks coming in that are teachers, the police, people that can’t afford the high dollar apartments, that need a place to live. Those are the B and C class apartments by price. We’re not building any of those. So we call that affordable housing. That’s a whole nother topic, but that’s a concern going forward just to be aware.
Another reason for our economy going so strong is diversified employment. I [inaudible 00:09:50] from, I think, Yardi. And then here’s a chart that I picked up from them. A nice, pretty charts showing health and education services, 16% leisure hospitality. You can see the numbers. Get an idea of what’s driving our economy here. The important thing is some, maybe 10, 15 years ago, we were not this diversified. So when things went construction, especially went sideways, we went sideways. Now, one aspect can go sideways and there’s others that’ll pick up the difference.
So, apartment sales. This is what every broker is looking for. So I’ve got a chart on the left for the last 10 years. In the last five years, we’re averaging a little more than 300,000 communities sold, 10 plus units that I track. And what’s interesting this last year, 2020, we were on track with the first quarter and then COVID hit. And although there might’ve been a lot of deals in the hopper, nobody knew how to get to a title company, had to do signatures, had to do inspections, the due diligence and so we dropped off. But in the last quarter, look at that, we’d doubled, from quarter three to quarter four, the number of apartment sales in this last quarter or so we are back on track and have a monstrous 2021 is my impression.
So here’s the sales volume again in the orange, on the bars there. And also you can see that if you can’t read this very well, the green number on the top is the United States price per unit. And the blue is our Phoenix price per unit. The point being here that we are less than national average, especially from neighboring cities. So, that gives us room to grow. So we can still sustain higher prices as we go forward with the apartment complexes. So here’s a fun thing, and I’m sure as an agency you get this on a regular basis. Somebody calls up and they want a particular cap rate. So are cap rates important? They are and they’re not. They are if you’re looking at a property that’s been repositioned or a fairly recent construction. So, there’s not a lot of room for increasing with repositioning.
So then the property tends to sell by cap rate. And I would say between five and a six cap rate on real numbers. My reason for saying no is some properties, if they’re vacant, they’d have zero cap and that might still be a great potential but even properties in three or four caps, if they’re run poorly, or if their rents have been maintained very low because the landlord likes the tenants and they haven’t raised their rents, which happens occasionally, I don’t really care about the cap rate. It’s really what the value of the property is. If it can be repositioned and properties that are likely to be repositioned are those that are C quality’s, not being run very well or mishandled or not doing too well, but in good areas like C properties and B areas. And then the value of that property, the amount of money that somebody would pay for that property as is, would be based on the amount of money to reposition the asset, the time to do the work, the future rents after the reposition and how much the return the buyer wants to achieve upon a future sale.
And Joe, if you’re listening, that’s exactly what we’re going to look for, for you. Now, the housing market. Boy. This is amazing. One of my agents, Jan Long is on the call here, gave me some things, he said that, I’m going to read this, the competition is sometimes so fierce the buyers are often waiving appraisals, finance contingencies, and having earnest money, become non-refundable on a much shortened due diligence period. It’s one of the highest appreciations in the United States and certainly the largest net population inflow in the US, we have a shortage of available product at a huge demand. This is from the Cromford Report. I had a nice talk with Tina Tamboer from the Cromford Report here a couple of hours ago. The supply, normal times, it would be at a 100. So, where the yellow is at normal times, whatever normal is. So we have a supply, a very minimal supply, we have a huge demand that creates a market index extremely high.
So what’s the impact of that? With prices going skyrocketing here. I think that if houses go up in value then if some of those are going to be rented, the rental rates are also going to go up. If rental rates go up in houses that will support quality apartment complexes will also be able to raise their rents. And if we have higher rents in the apartment complexes, the values of those apartments complexes will also go up. So the apartment market is on fire. Our economy is doing extremely well. There is nothing in the immediate future that looks like it’s going to derail any of that. We have a lot of people from California coming in as buyers, as residents, bringing their companies in, but there are some concerns. And people that know me know that I’ve been a Trump supporter, not at everything that he’s done, but certainly a lot of the fiscal policies and tax policies and the new administration is not that way.
So there’s a concern. Certainly with the printing of money and doing things that will increase the costs of goods, such as gas if we stop fracking and things like that and gas prices go up, we will have inflation. With inflation, we will have increased cap rates. Increased cap rates means the values of apartments will go down. So be careful as this new administration imposes some of their new legislation. I see values dropping, even though rental rates are up, I see values coming down, not today, but soon. Realize also the apartment market, all our markets, are cyclic, the apartment uptick has been an uptick for 11 years. That’s historic. So at some point, things will go down after they’ve gone up for a long time. The administration might be talking about increased capital gains, maybe restrictions on 1031 exchanges and indirect taxes.
There’s already been extensions of the evictions. And so some apartment owners are having a hard time getting tenants that are not paying out of their properties. I talked to Bob Myers with Avantgarde and his reference, and some of the other references are at the end of this presentation, Bob said that he’s been able to get some of the tenants out of their properties if they go to court and show to the judge that the management has provided to the tenants ways and mechanisms for them to obtain government support monies for their rent. And if he can show that and the tenant says, “I didn’t follow through on those,” Bob said he’s been able to have tenants that are not paying evicted. And then one are the big things that I don’t know what’s going to happen as we open the borders, which is apparently what we’re doing, a lot of new immigrants will come into Arizona, into the United States.
Talking to Tina Tamboer And she said most of those will pass through and go to other states, but some will probably remain there. The impact of that who knows, but that’s certainly those under immediate concern. And then on the US concerns, Arizona is part of an economy that’s related to the United States. The United States economy is related to the whole world. If we reduce good paying jobs, like the pipeline, what impact will that have? We’ve got a lot of unemployment still out there. If we reverse our independence on fossil fuel, it’ll make our country weaker. We will not be able to negotiate well worldwide. Some of the reliance on wind and solar sounds good, it takes a lot of rare earths.
And I’m a geologist. So rare earths are not easy to find. And most of those, 90% plus of those, come from China. So our dependence on China, if you’re going to have wind and solar will increase. And again, the opening of the borders is a big concern. So these are things that if you own an apartment complex and you’ve had it for three or four years or so, and you’ve got good equity and you need that equity for your retirement or for kids or something like that, there are things out there to be aware of that might be a reason for you to consider selling.
So some buyer opportunities right now. This is a big one. This is what everybody’s looking for. You buy a property, a C class property in a B area, you reposition it. Suppose you buy a property for say a $100,000 a unit you, put in $30,000 a unit, now you’re up to 130 with brokerage, 140, and you sell it for 190. You just made 30 or $40,000 per unit. And you can do that probably within a couple of year turn. That’s the ticket for making money today in our market. Another place to look for opportunities, along the light rail. I’m interested to see what happens along Central Avenue as you go South from the Phoenix area to South mountain. A lot of land down there, a lot of C properties that could be repositioned and go from there. So, another area that people are starting to get into are… People thought that you couldn’t build or reposition a property because it wouldn’t sustain the higher rent. That’s proving to be wrong, or it’s opportunity. For example, Sunnyslope, which has been overlooked in North Phoenix, if you don’t know Phoenix that well, has been overlooked as a place to reposition assets.
Not true anymore. There’s people that live there. They live in apartments and they want their kids to stay there, they like the schools, but there’s no place they can go that’s a nice property. So if you repossession those, you’ve got tenants waiting. Those are some opportunities.
So helping buyers. If you’re an agent, put your ears on, listen to what the buyer’s looking for. You need to educate the buyer on the market and what it takes to get into this market. But you don’t want the buyer to say well, they want a $5 billion, let’s offer $4 million. That’s not going to work in this environment. You need to be able to step up and the buyer needs to not to waste people’s time and there’s people who want to get into this market. This is what you do.
You need to be able to write an offer that’ll be accepted. Put yourself in the position of the seller, the owner, when you write an offer. What would make that owner take your offers? Short due diligence, hard money early on or with the seller’s acceptance, knowledge that the buyer has seen the property, accustomed to that, ready to jump, will probably not re-trade unless there’s some health and safety issues or something that you would not be able to see in due diligence. And know the market. And if you’re a buyer, ask the agent, and if you’re an agent, know the market, know the rental rates, know what the best financing are, be able to support and give to the buyer a good management company or a selection of management companies or vendors for HVAC or whatever you need.
And you really should know the past sales and current listings in the discipline you’re working. You don’t need to know the institutional sales if you’re working, say, B and C properties in the 10 to 50 units or 50 to 100 units. So just things to know. So, here’s my thought for the apartment forecasts. The near term, things are good. Things are rosy. Rental rates will go up. Enjoy the cash flow. You’ll have a continuous strong occupancy and the rents will increase. Going forward, be attentive to those owner concerns that we’ve mentioned here a moment ago.
So as long as we have adequate power for AC, so who knows what they’re going to do. If they’re going to impose a bunch of solar things, then we have a bad day, who knows, but as long as we have adequate power, we should continue to attract companies, individuals, and be also a retirement haven. And then maybe my real fear is the administration. And we may get a very strong pushback against the liberal ideas, the left-wing ideas going forward. I don’t know where that’s going to go, but that’s a concern to see what happens going forward. Here’s some useful resources, CoStar, Yardi, Vista, AZ Rhea, American Title, Avantgarde Catalyst. Those are folks. If you need information, you can’t find it from some of those folks, let me know but these are good resources.
So my group, myself, Chris, Jan long was my original partner, started playing tennis with Jan, what, 41 years ago. And we’re also forming a new little website to house all of our newsletters, apartment data and things like that. And that’s the Metro Phoenix Commercial, the website is there. Questions.
Jill:
Jim.
Jim Kasten:
Yes ma’am.
Jill:
Yes. There’s a question from Jan Long. There are a lot of residential agents out there, do you take referrals?
Jim Kasten:
Jan, thanks for the question. So we do sometimes. If somebody just calls a buyer from Timbuktu and calls, I want to buy something and they refer it to me, that’s not a referral. But if a residential has a good buyer and the buyer can make a quick decision, they’re familiar with the market, or they can be educated to the market, they’re ready to go, they’re good buyers, they’ve got a track record, they know apartments, then happy to take that referral. We will do that. So it’s just a matter… I need to screen the referral. The other thing I have to be careful of, if I’ve taken a referral, which I’ve done with Joe, that I’m going to meet with tomorrow and he’s on our call here, whatever he’s looking for if I have another person looking for exactly the same property, it may be exactly the same area, that’s not fair to the person that I’ve taken on as a referral.
They need to know that I’m working for them. So, the question for you Jan, is a great question. And so the answer is yes and no. So, any other questions out there? And so this is a great picture. If you can see the screen, this is one of those haboobs coming in. So I think it is a wonderful picture of Phoenix. And if you haven’t seen an haboob like this, they’re pretty amazing.
Jill, any other chat questions have come in?
Jill:
Not yet.
Jim Kasten:
All right. Well, that’s what I’ve got for you guys. I hope that’s a help. There’s details on a lot of the apartment market that we have. I just didn’t want it to hit some high spots.
Jill:
One more question.
Jim Kasten:
Sure.
Jill:
So again from Jan. So little products, so many buyers, how do you find owners who are willing to sell with so little to replace it with?
Jim Kasten:
Jan, you’ve got these great questions. They’re perfect. It’s true. Probably almost most residential agents and a lot of the commercial agents that I talk to, they’ve got buyers. Everybody says to the agent find me an apartment building, find me a deal, find me a property I can reposition. So, here’s what we do. And again, I’ve been doing this for 20 plus years. I’ve had newsletters go out to people. We’ve had blogs go out to people. We’ve had meetings. We’ve had all sorts of things. We’ve stayed in contact with owners. So if owners are in the mood of selling or have a thought even about entertaining an offer, Bill will usually let me know. So, that’s a big help. So I will get information that others might not get. And a lot of times, probably half of the units out there that are sold, apartment complexes that are sold, never hit the market.
There’s so many buyers you don’t need to advertise. Now, if you’re representing the seller and owner, you want to have lots of exposure so you get the best buyer. The best buyer will be the highest price and the most dependable closing. So that’s what we do. If you’re an agent out there trying to find an apartment complex for your buyer client, it’s very, very difficult. We probably have a leg up on most people and so we can help. And so we take referrals, again, if they’re good referrals, but good question. Any other thoughts out there, guys? Any other questions?
Jill:
Yes. Edna has. How do you find off market properties?
Jim Kasten:
That’s an even better question. That’s a trick as again, we’ll make calls, my team and my staff, we’ll be making calls all the time to apartment owners and every apartment owner out there is probably getting four or five calls every couple of weeks. They’re just being inundated by people calling saying if you have any interest, we have a buyer that’s driven by your property, likes the properties, is a 1031 exchange, knows the market, willing to pay high dollar, would you have any interest in entertaining an offer from our buyer? Again, four or five calls every couple of weeks to every owner, so how do you find which of those owners is ready to sell? Part of it is you have to get on the phone, you have to call those owners.
So, that’s part of what we do. The other thing, we have a leg up, again, I’ve been contacting apartment owners for a long time. So if they have an inkling about selling and we’ve got an allegiance already with them, maybe we sold them the property some years ago, they’ll let me know. So, calling agents and asking them if they have any off market opportunities is one way. It’s just dog hard because most times it’s so difficult to find an owner that’s willing to sell or even entertain an offer that when an agent gets that information, they know a property or an owner is ready to sell, they’ve got 10 buyers ready to plug into that offer. So, it’s really hard to find off market opportunities. I would suggest you follow CoStar, follow [inaudible 00:28:19], follow things, but it’s dog hard. So, the best is maybe get talking to an… I’m a good experienced agent with apartments. There’s a number of good experienced agents out there that are friends of mine that I know most of the apartment agents we’ve done deals over the years, maybe talking to them to see what they have. And maybe if you’re looking for an off-market deal, talk to an agent, say, “Listen, I don’t need any commission.”
Let that seller, let that agent that has that lead, get the full commission, whatever they can get, and you get your money, you get paid by asking your buyer to pay you a fee. That’s probably the best way for you to get into an off-market listing as a thought. So good question Edna.
Jill:
Can you go back to the resources screen, Carlos and Mira wanted to take a photo of it.
Jim Kasten:
So, Jill, hopefully we will have this presentation available for people.
Jill:
Yes and we can send it out to everyone, the recorded version.
Jim Kasten:
So we’ll have the recording and we can also send just the slides. How are we going to do that?
Jill:
We can do that. I believe Tarja has everyone who is registered so we can go ahead and send them out.
Jim Kasten:
Great.
Tarja Panfil:
I can do it then.
Jim Kasten:
Okay, cool. Again, lots of data, lots of summary things. We have a lot of detail that we have in hand that can support what we’ve said. And thank you for joining the presentation. I hope this has been helpful.
Jill:
One other question. What is a typical co-broke on 1 million plus by big house brokerage houses these days, if at all?
Jim Kasten:
Well, what’s my first thing I have to say, that it’s all negotiable and there’s no set fee. Is that how we say that, Jill? I would think still on the smaller million-dollar property you can get five to 6% total brokerage, so maybe two and a half, something like that. As you go higher than that, maybe a big house might offer you 2%. I remember when I worked with Hendrickson Partners, Mark Forrester, who was still working there, great guy, he was happy to have 1% of the commission, but then he was doing a $40 million deal or something like that. And it’s very competitive out there. It’s hard. So again, if you’re thinking about the commission and all you have to sell is yourself and your time, you might think about getting your fee from the buyer to make it so you can find a better property for the client. It’s not that much over the big term of the other major part of the deal. So if that helps, I know it’s misleading, but the 6% on everything has gone away. It’s getting so competitive out there. It’s tough.
Jill:
That is the last question I have at this point.
Jim Kasten:
Okay guys, thank you very much. It was handy. I have a dog sitting on the couch. Nobody walked by the outside door there to make the dog bark so you missed the dog barking. I do have my Trump hat sitting here just as a support. And the picture on the back here is the Taos Pueblo and Wheeler Peak in the background. So guys, again, thank you. My contact information, Jan’s contact information, he does a lot of the smaller complexes, and Chris as well, our info is on the slides. So feel free to email us and call us with more questions. And thank you for attending. Talk to you guys.
Tarja Panfil:
Thank you, Jim. That was wonderful. Thank you.
Speaker 4:
Thank you.
Speaker 5:
Thanks Jim. We will have the recording. And the slides on the website in a couple of days.
Speaker 4:
Perfect.
Speaker 5:
Thank you.