Opinions on the rash of construction in the luxury rental market? (Phoenix: low income, for sale)

[Jukesgrrl]

Everywhere I go in Tucson, especially the Northwest, I see huge construction projects that are billed as "Coming ... Luxury Rental Apartments (or Townhomes)." Also everywhere I go, I see existing rental properties, some I know for sure are nice, with big signs offering special deals such as two bedrooms for the price of one, free washer and dryer, so many months free rent, etc.

What's wrong with this picture? The builders of the new complexes maintain that there is a "shortage of high-end apartments" available in Tucson. Yet properties like Finisterra, Veranda at Ventana Canyon, the Golf Villas in Oro Valley, Quail Ridge on East Sunrise, Williams Centre on Broadway, and many of the existing complexes on River Road all advertise vacancies.

I get it that the young trendsetters have to have THE latest and greatest. Multiple pools and spas, Starbucks on site, in-complex movie theaters, laundry rooms in each apartment, but they come at a higher monthly rental price than a unit in a building that might be 10-15 years old. But many of the older complexes already have these things (minus the Starbucks, maybe) and have upgraded their kitchens and baths with granite and stainless and they are still charging less.

Encantada at Riverside Crossing (River Rd. and La Canada) opened its 300+ unit complex last summer and claims to be filled to capacity. The same company is building a huge complex, Encantada at Steam Pump Ranch, in Oro Valley. Other coming attractions are Legacy at Dove Mountain (multiple buildings), The Place at Creekside (East Speedway), The Place at Canyon Ridge (West Broadway), something else at La Cholla and River, and a huge complex of patio townhomes behind the Target at Ina and Thornydale. Just those I know of probably account for more than 2,000 new, top-price, rental units coming online. And perhaps there are more of these places I haven't sighted yet.

The University built new dorms in recent years (that gigantic cement thing near First and Wetmore that looks like a Soviet apartment complex, for one) And most of these new complexes are too far from the University to attract even students whose daddies have deep pockets. It seems like we are getting fewer snowbirds each year and while we need rental housing for people who will be assigned to Davis-Monthan are there more of those than there used to be?

So any guess as to where the tenants for these new places are coming from? And what's to be done with the older buildings that already exist? Will they just be allowed to turn into dumps? (Which would be a pity, since most are in high-traffic locations.) In the eight years I've lived here, Pima County has LOST nearly 100,000 residents. For every company that brings new jobs here, other entities still keep cutting jobs. Where are the tenants coming from? I find it hard to believe these obviously flush builders haven't done their research.

I suppose the still-unresolved mortgage mess means that young people will take longer to move into homes they've purchased than previous averages. But how does one save for a home when a majority of one's paycheck is going to a "luxury" rental? And even if young families rent, don't they prefer to rent houses?

Any opinions out there?

[rational1]

It's a free country.

[Jimbo107]

Originally Posted by rational1

It's a free country.

I'm a Noob to the forum but I already notice a lot of flip responses like this. Is this the norm around here?

[Jukesgrrl]

Originally Posted by Jimbo107

I'm a Noob to the forum but I already notice a lot of flip responses like this. Is this the norm around here?

Honestly, Jimbo, I'd say no. Lots of people pose hypothetical questions like the one I raised and they usually provoke discussion, which was my only motivation. As I said, I'm sure the companies that are placing huge monetary bets on this market have their reasons. I am merely at a loss to understand what they are and I thought Tucson residents here might have ideas.

[Jimbo107]

As someone who is moving to the area, seemed like an interesting question to me.

[tom4416]

Sometimes the reasons for building aren't always obvious. Things like tax incentives, incentives for making a percentage of the complex low income, other projects that have been fully depreciated and they need the write offs, decreased investor expectations as to returns (who ever though 3% would look good ). Expiring options on land, expiring loan commitments and the list goes on. Often they will think a given area is more desirable and accessible and that they can pull existing renters from other projects. Plus, the idea of "far away" changes every year as I-10 opens new interchanges or parallel surface streets get improved. Sometimes something as simple as a commitment from Sun-Tran to open a new route or new stop is enough to encourage development. Or the developer knows in advance that certain companies have optioned land in certain areas to build employment projects or even just to build retail and retail attracts residents as they see it as convenient.

You also have the fact that real estate in general is roaring back in Arizona - third largest appreciation in the first quarter behind Nevada and Calif. so developers may be anticipating increases in raw land and are grabbing it up now and don't want it to just sit and now produce some cashflow. It's amazing how little "high end" adds to the total cost of a large apartment complex since the builder is buying in bulk and everything is cookie cutter. Sure, granite is expensive for you and I because every request is different, requires measuring and then hoping it didn't get screwed up. That same countertop builder can run 300 of the exact same counters for a development and cut the price by 50% over retail.

My sense is that the retirement contingent in Tucson is growing and growing as permanent residents, not snowbirds. Phoenix doesn't have the appeal it once did, Sedona is still expensive as is Scottsdale. Some of the retirement communities outside Phoenix, like Sun City are just too huge and frankly, a little bit tacky IMHO. Tucson is more laid back, more liberal, more health oriented and actually has some top notch medical facilities that are not real well known outside of the general area. Some of those retirees will rent for a couple of years to make sure it's a good fit and some would rather just rent period. They have no need to be downtown in the thick of things and so would rather be in less congested areas. Of course, remember that to someone from Manhattan, downtown Tucson is virtually "deserted".

What surprises me more than anything is the number of people who choose to rent anywhere. With today's minimal mortgage rates and still depressed housing prices, rent on a nice two bedroom apartment will buy a LOT of single family house. Granted, some people have ruined their credit because of the recession but there are a lot of second chance programs out there which are legitimate (and LOTS that aren't). Five years from now, mortgage rates will once again be a more realistic 6-7%, house prices will have gone up 25-35% from today and people will regret not pursuing ownership opportunities when the time was ripe. Of course, not everyone even wants to own a home, would prefer to rent a luxury apartment and leave someone else with the headaches of maintenance, taxes, repairs, etc..

[Jukesgrrl]

Interesting points, Tom. Your suggestion about options on land expiring seems to be a real possibility. Also, your point that making something "luxury" not costing the builder all that much is certainly valid. The word "luxury" slapped on a rental really just means "not a dump" in many locations.

I remember the first year I moved here (2005), there was a shortage of condominiums in Tucson. Some of the better apartment buildings were flipping to condo status. Current residents were given first dibs with incentives, but anyone who didn't buy lost their lease and there were potential owners lined up to take the unsold units. There was one building in my neighborhood that had a lottery to parcel out the remaining units, because most of the units were purchased by the renters. I've often wondered how many of those mortgages went into foreclosure since then.

Perhaps some of these builders are prepared to get out of the rental market and sell these units if the market for condos returns to Tucson. Condo prices in Tucson have never slid to the degree they did in Phoenix or Las Vegas, probably due to the lack of inventory. Most of the condos on River that are for sale have asking prices almost double what a similar unit in Phoenix would go for today. To my mind, units built as rentals and flipped are never as good quality as units built specifically to be condos, but that never seemed to keep much of the market away in the past. The townhouses behind the Ina Target, the two complexes called Encantada, and Legacy at Dove Mountain certainly have the appearance of condo developments to me and are in places that wouldn't attract the student market.

[Saguarogirl507]

Many more people are renting everywhere now. It isn't just Tucson. I live in Boston where housing is really expensive. Young people just don't have the money to buy ( I am of course generalizing). They have huge student loans, families to support etc. Renting gives them the option to live where they want to live without the huge costs associated with buying. My daughter could never afford to buy the condo she is living in but she can afford the rent. I think this is where we are heading now after the housing crisis goes to it's next level.

[tijlover]

Following city developments on Skyscraperpage.com, this is taking place clear across the country. My guess, they're building these with the intent of converting them to condo's, at some point in time, when lending practices change.

But I have to laugh when they advertise these places as luxury buildings!

To me, luxury equates to solid concrete construction!

[Mountainsofmisery]

Developers are not looking at where the market is today, they are looking at where they think it will be tomorrow. The demographics of an aging population and one that has many members desiring to live in a warm climate would seem to benefit AZ in general and Tucson in particular. Actually, not Tucson as it is or is becoming known as a bit dysfunctional, but certainly Oro Valley and Marana in the NW. We have not yet moved to AZ but have a place in OV. Our criteria was warm winter weather and plenty of cycling and hiking opportunities. FL is too flat and too boring. Southern Utah is beautiful but not warm enough in the winter, So Cal, that was a close 2nd and we may end up there after selling our main residence but for now, OV with the weather, the mountains, the cycling, the hiking it's nirvana for us and I'm sure there are plenty like us.