FOR THE MOST PART, Las Vegas, Phoenix, and Miami really have nothing in common but sand.

Just look at their histories: Vegas, the most modern of the three cities, was founded in 1905 and was mostly notable as an atomic bomb testing site for the Manhattan Project until mobsters built it into an oasis of gambling. Phoenix, so named because it was built on the ruins of a Native American civilization abandoned in 1450, was founded by a Confederate veteran who wanted to name it “Stonewall.” And Miami was the only major U.S. city conceived by a woman—Julia Tuttle, a citrus growing entrepreneur, who owned all of Miami's land but gave nearly half of it to a railroad magnate to attract a train line to South Florida.

Yet in recent years, these three metros have all been linked in a tragic way—as the poster children for multifamily distress. All three markets reached dizzying heights in the run-up to the recession, then plunged to terrifying lows in 2008 and 2009. And market watchers and investors have been incredibly wary of whether any of the trio would ever be as strong as they were before the crash.

The forecasts are mixed: Vegas is the laggard, the only one of the three still truly distressed, though Phoenix continues to nurse a heavy hangover from overheated valuations. Miami is the healthiest of the three, confidently climbing out of a towering shadow of condos.

“This is just what happens in Phoenix and Miami every 10 to 15 years, and then it comes back to the surface. For Vegas, this is probably only their second boom/bust,” says Ben Thypin, a senior market analyst for New York–based market research firm Real Capital Analytics (RCA). “When you're investing in Phoenix and Miami, you can price in some rent growth or, at the least, population growth. Whereas in Vegas, the economic outlook is just so uncertain."


Sin City is still trying to atone for the excesses of the housing boom. The market is struggling to absorb a wave of overbuilding that came on line throughout the credit crisis. Five years ago, the vacancy rate in Vegas was a healthy 4.6 percent, but as builders exuberantly broke ground, fundamentals took a nosedive.

From 2003 to 2007, home builders and condo developers scooped up available buildable land at prices the apartment guys just couldn't aff ord. Then, at the beginning of 2007, forsale builders stopped pulling permits and, suddenly, apartment builders had an opportunity to buy land again. An average of about 3,200 units was delivered annually from 2007 to 2009, and by 2010, the vacancy rate reached a high of 11.8 percent. Simultaneously, the job market tanked, dropping nearly 15 percent from 2008 to 2010. This year, however, employment has stabilized—it's the first year without net job losses since 2007, according to New York–based market research firm Reis.

“To start healing, you first have to stop bleeding— Vegas has finally stopped bleeding, and the healing process might take a little while,” says Christopher Bentley, a Las Vegas–based principal for brokerage firm Apartment Realty Advisors. “We think we're a year or 18 months behind Phoenix in our recovery."

Indeed, Vegas is late to the comeback party. In the third quarter, rent growth was seen in 81 of the 82 markets that Reis tracks—only Las Vegas was left out. And a look at the recent transaction market confirms the reality. There have been 21 sales this year through early October of $2.8 million or more, and of those deals, a lender or servicer was the seller in 12.

The lowest recorded cap rate this year was 5.2 percent, when the 341-unit Acapella, built in 2007, was bought for $41.2 million by Birmingham, Ala.–based REIT Colonial Properties Trust in March. But that was an outlier, a cap rate that caught everyone by surprise, Bentley says, and a buyer profile that is far from typical. “Vegas is typically a private capital market; it always has been. We just don't have a lot of institutions here,” Bentley says. “A lot of today's buyers are the ones that missed out on the opportunity in 2003, and we're also seeing a lot of buyers come from Phoenix because they're being priced out of the market there."

There are a couple of reasons that large institutions generally avoid Vegas. It's a small market of just 160,000 units, so it's difficult for an institutional buyer to build economies of scale. It's also a longterm hold market (for more than a decade, for example), especially now, and many REITs don't have that business model. But the volume of distressed apartment properties in Vegas is huge relative to overall supply. There's more than $2.1 billion in distressed apartment communities (either delinquent, in default, or REO) across 116 assets in Vegas, according to RCA. In terms of troubled volume, that places the market third behind only the nation's largest apartment market, Manhattan, and Phoenix.

In May, there was a sliver of hope that the transaction market would start to clear up. More than $1 billion in distressed Nevada assets—mostly located in Vegas—were being sold on by special servicer LNR, including seven multifamily assets. “We all thought that was going to open up the floodgates,” Bentley says, “but it really hasn't."

Phoenix-based Alliance Residential bid on four of those assets and ended up with one—a $50 million non-performing note that it bought for $32.5 million on the 524-unit Fountains at Flamingo. It was a great discount for a brand-new development and is yielding 8 percent out of the box, a return that would be difficult to find anywhere else. “I suspect in Phoenix, it would have been $115,000 a door,” says Jay Hiemenz, Alliance's CFO. “But Vegas continues to have job losses, and it's still out of favor, so there is still a big dislocation in values."

In general, the best Class A assets are trading just under 6 percent, while the better B product is trading in the low–6 percent range. C product has been hardest- hit—what sold for $65,000 a door in 2006 is today selling for $20,000 a door. The average cap rate in the market across all classes is 7.3 percent over the past year, according to RCA; in Phoenix, by comparison, the average cap rate across all classes was 6.09 percent over the past year.

Unfortunately, the pipeline is still robust. More than 1,000 units came on line this year; another 1,500 units will be on the market next year; and there will be more than 2,000 units added annually from 2013 to 2015, Reis projects. With a vacancy rate currently in the 8 percent range, that influx of supply could be too much for the market to handle. “On a five- to seven-year horizon, Vegas is going to be fine,” Bentley says. “The question is, what's going to happen in the short term? We just don't think there's going to be a significant change in the next two years. We expect some job growth, but we're not expecting miracles."

MARKET METER: Still struggling.

Las Vegas is a solid long-term bet for local and regional investors, but the next few years will see continued supply excesses, troubled fundamentals, and fire sales of assets.


The Phoenix apartment market has truly risen from the ashes despite being one of the biggest casualties of the downturn. From the beginning of 2008 to the end of 2010, the metro area lost 232,400 jobs—about 12 percent of its total workforce. But job growth stabilized this year; the vacancy rate fell about 200 basis points, to 7.5 percent; and rent growth returned to the tune of nearly 4 percent, according to Reis.

And the proof of the recovery resides in the transaction market. The Phoenix area had seen 87 sales of more than $4 million year-todate as of mid-October. In all, Phoenix has recorded $1.4 billion in transaction volume over the past year, with an average cap rate of 6.09 percent, according to RCA.

The market has now seen two consecutive years with 100 or more multifamily trades—though about half of all trades are considered distressed. “Cap rates have moved lower, price per unit has moved up, and there might not be as many off ers in Phoenix now because it's starting to reach the price point of, where do we go from here?” says Rocco Mandala, a Phoenix-based executive vice president at broker CBRE Capital Markets. “In the stronger submarkets, you're not buying below replacement cost anymore, and it's starting to make more sense to develop."

The lowest cap rate recorded this year was 4.2 percent when Arroyo Villas purchased the 196-unit Maryland Lakes Apartments for $5.15 million, sold through the U.S. Bankruptcy Court. The property last traded in 1999—for $7.1 million. Several higher- priced deals feature cap rates of 5.5 percent or lower, including the $33.9 million purchase of the 332-unit San Cierra in Glendale, Ariz., by Belkorp Industries (5 percent) and the $16 million purchase of the 205-unit Arete in Phoenix by Weidner Apartment Homes (5.5 percent).

Weidner—which has purchased more than 6,000 units in the Phoenix and Tucson areas over the past two years—was also responsible for the market's largest trade. The Kirkland, Wash.–based company paid $76 million for the 724-unit Trillium Pinnacle Peak, constructed in 2009.

In fact, there have been 22 sales of more than $20 million in Phoenix this year. “Phoenix valuations have already recovered; they've already factored in the recovery,” Hiemenz says. “Concessions have almost gone down to zero on the in-town stuff , though the suburban stuff is still a little softer in places."

Alliance has definitely sold into that strength. In July, the company disposed of the 280-unit Broadstone Canyon Crossroads, built in 2008, for $32.3 million (it was bought by Baron Properties). That same month, it also sold the 240-unit Level at Sixteenth, which came on line last year, for $40 million to Hartford, Conn.–based Cornerstone Real Estate Advisors.

While high-quality product is trading at healthy prices, the overhang of distressed properties remains significant. The overall market has $2.2 billion in distressed volume among 168 properties that are either delinquent, in default, or lenderowned, according to RCA. But most market watchers say the distress in Phoenix has more to do with overheated valuations than overbuilding in the last cycle. Vacancies are still high, but only because the employment market is still struggling to recover.

“The return of high-priced acquisitions in Phoenix over the past year and a half supports the thesis that it was a valuation issue more than oversupply,” Thypin says. “Properties are trading again at competitive prices, whereas if there was a huge supply, they would trade at higher yields."

Indeed, 2011 was the year that Phoenix reversed its skid, posting the first year of job growth since 2007, at 1.5 percent, which should accelerate to 2 percent in 2012, and then reach around 3.3 percent through 2014. “We had a large construction employment base, so when the construction stopped, we needed to correct to continue to grow,” Mandala says. “We got hit pretty hard pretty fast, but we corrected as fast as any market in the country."

MARKET METER: On the upswing.

Phoenix has a strong story of multifamily fundamentals, so local and institutional buyers are interested. If another cycle of overvaluation is avoided, and the jobs outlook stays strong, this Arizona hotbed could be a formidable market in a few years.


Unlike Vegas, Miami has largely rebounded. Long dogged by condo overbuilding, the market's fundamentals today are incredibly healthy, and investors are quickly clearing the oversupply.

The swift pace of recovery has surprised many local dealmakers who see a mountain of equity chasing multifamily in Florida, with all-cash buyers paying at or above brokers' valuations, banking on significant rent growth as a scarcity of product drives up prices. “There's a lot of frothiness in the multifamily space here—when you have a property and you put REO or short sale or distress on it, the sharks are out,” says T. Sean Lance, managing director of broker NAI-Tampa Bay. “It's not uncommon to get 40 or 50 off ers. We've done over $100 million in deals this year, and not one of them had financing attached to it."

Lance is also president of NAI's Troubled Asset Optimization business line in Florida. The program, which off ers valuation, property management, receivership, and disposition services, has done more business this year than any year since its genesis in 2007. The company has also sold more than 1,300 bulk condo units in Florida in the past 15 months. “We think the window for those kind of opportunities is closing rapidly and by the end of this year, most projects will have been picked through,” Lance says. “The ones that are out there are going under contract or being actively marketed, and we just don't see too much inventory being available after the end of this year."

Despite this positive momentum, the volume of distress in Miami is still significant—RCA estimates $1.5 billion in distress among 78 apartment assets. But it's not as bad as it could've been, for two reasons. “The value in the rental space has returned so fast that it has prevented a lot of the lender foreclosures," says Charles Foschini, vice chairman of South Florida markets for brokerage firm CBRE Capital Markets.

But an even more significant factor is Florida's borrower-friendly approach to foreclosures—it's a lien state, not a judicial foreclosure state. “It can take up to two years to go through a foreclosure, even when uncontested,” Foschini says. “It's very difficult for a bank or lender to get assets back."

In addition to the local uptick, interest in Miami real estate is high among foreign investors, who have been extraordinarily active in the distress arena over the past year. The bids for a B asset or greater will typically include a significant amount of South and Central American buyers, as well as investors from Europe and the Caribbean. And high-quality assets are commanding some healthy cap rates. “It's not unusual to get into the 5 percents on a pro forma income for B and A assets in South Florida, purely based on the expected increase in rental values, as well as potentially a historic gap between supply and demand,” Foschini says. “There's a lack of tradable inventory, and strong institutional interest in Florida as a whole, and that is driving down cap rates."

The falling cap rates and healthy fundamentals—Miami's vacancy rate is just 4.7 percent, and rents grew 4 percent last year and another 2.5 percent this year—have hastened a lot of new development activity. In the Miami area, more than 60 new rental projects have been announced this year, though only a fraction of them are breaking ground: The expected pipeline for 2012 is 1,073 units, according to Reis. “Very few groups are able to execute on that—they're having a very difficult time getting their equity and debt lined up,” Lance says. “But if you don't get your project out of the ground next year, you're going to be way behind the cycle again."

Still, South Florida's volatility isn't for everybody. Rochester, N.Y.– based REIT Home Properties is looking to exit Florida and is marketing a portfolio of two assets comprising 836 units in North Lauderdale. The company bought the assets in 2004 with the intention of building the region into a hub, but the condo conversion craze drove prices way too high, and the credit crunch that followed drove rents way too low. “It became clear to us that Florida is more boom/bust, more volatile than our typical markets," says David Gardner, Home's CFO. “It's probably around the corner where we'll see some positive rental growth, and we're trying to sell into that strength. We're pretty confident that we're going to be able to sell for a pretty good amount."

MARKET METER: Coming back strong.

Miami's longtime ties to foreign investors and its constrained supply have the market poised for great returns in the near and long terms.

Las Vegas

Ӣ 2011: The first year without net job losses since 2007
Ӣ 57%: Percentage of high-value assets ($2.8 million or more) sold by a lender or servicer
Ӣ 2014: The year rents will likely peak again, after hitting an average of $826 in 2008
Ӣ $2.1 billion: Value of distressed apartment communities (either delinquent, in default, or REO) in Sin City
Ӣ 2,000: Delivery pipeline expected annually from 2013 to 2015, up from 1,500 units for 2012
Ӣ Mid-7%: Las Vegas' vacancy rate, up from a low of 4.6% in 2006


Ӣ $707: Average rent level in Phoenix, below the 2007 peak of $713, but projected to rise 4% next year
Ӣ 7.5%: Metro vacancy rates, after falling earlier this year
Ӣ $1.4 billion: Phoenix transaction volume over the past year, the second consecutive year with 100 or more trades
Ӣ $2.2 billion: Value of distressed apartment communities (either delinquent, in default, or REO) in Phoenix
Ӣ 12%: Amount of the total metro workforce wiped out from 2008 to 2010
Ӣ 1.5%: Job growth in Phoenix, the first positive number since 2007, which should accelerate to 3.3% by 2014


Ӣ $1,058: Average monthly rents in Miami, the highest in history, though just $3 more than in 2007
Ӣ 2.5%: Projected rent growth for 2011, down slightly from 4% growth in 2010
Ӣ 4.7%: Vacancy rate by the end of 2011, projected to fall to 4.3% next year
Ӣ $1.5 billion: Value of distressed apartment communities (either delinquent, in default, or REO) in Miami
Ӣ 90: Number of rental units delivered in 2011, down from 664 units last year
Ӣ 5,973: Total number of units projected to be delivered from 2012 to 2015