Tucson, Ariz.—There's just one multifamily property under construction in the city at this time, which sums up what's happening in Tucson and other secondary and tertiary markets, according to industry observers.

The transactions that can pencil out these days are mostly in primary markets, says Ron Brock Sr., president and CEO of Pierce-Eislen, Inc., a Scottsdale, Ariz.-based apartment market research firm.

He counts only one apartment community under construction in Tucson, a 288-unit property being built by a local developer. There have only been three multifamily properties completed in the city since 2007, and two of those were affordable housing, according to Brock.

One was the 64-unit Mountain Trace Terrace property developed by National Church Residences, a leading national affordable housing developer based in Columbus, Ohio. The $5.9 million, two-story property is aimed at low-income seniors.

The small number of units coming online will help owners this year as the area copes with job losses and a soft economy. The climate means that many people will be looking at rental housing instead of for-sale homes. Apartments in the lower rent range and those targeting the workforce will likely see the benefits, says Brock.

Overall, the apartment market in Arizona's second-largest city has been pretty healthy and stable compared to many other metros.

“Tucson rents on average went up a touch at the end of 2008,” says Brock. “There are not many markets that can say that.”

At Class A and A+ properties, the average monthly rent for a one-bedroom apartment is $727. Looking at all properties, the average one-bedroom rent is $555.

Although owners are offering more concessions, they have not yet reduced rents, says Brock. But asking rents may drop this year.

The vacancy rate in the metro was 9 percent in the third quarter of 2008.

Sales also have slowed way down in recent months. For the 12-month period ending in November, only 12 properties changed hands compared to 46 in the prior 12-month period, according to Pierce-Eislen.

A big issue to watch in Tucson will be job losses. Starting in 2008 through the end of this year, the metro is expected to lose about 9,600 jobs, or 2.5 percent of its nonfarm workforce, according to the Arizona Department of Commerce. The biggest losses will be felt in the financial (18 percent) and construction (15.9 percent) sectors.

In February, the City Council voted to form a committee to look at local economic stimulus strategies. This came after a councilman proposed suspending some of the fees levied on developers to cover infrastructure costs.

Another key issue to watch is the state's employer sanctions law, which went into effect last year. It is one of the nation's toughest laws against hiring undocumented workers, which could hurt some of the rental properties.

In Marcus & Millichap Real Estate Investment Services' national apartment market report, Tucson falls 13 spots to the No. 33 spot in 2009.

Phoenix market update

Phoenix, the state's largest market, falls 12 spots to No. 31 in the Marcus & Millichap index.

The trouble here is a big supply-and-demand imbalance, with single-family homes and unsold condominiums encroaching their way into the rental market this year. As a result, the vacancy rate will increase 160 basis points to 12.8 percent in 2009, forecasts Marcus & Millichap.

“Local operators will increase concessions considerably in an attempt to stabilize occupancy levels, resulting in a 3.5 percent drop in effective rents to $582 per month,” says the firm.

Headquartered in Tempe, Ariz., Trillium Residential is a leading builder and manager of multifamily communities in the area.

Last September, the firm opened Trillium Pinnacle Peak, a 724-unit community in Phoenix. The Class A property is the largest community to open in the market in two decades.

Trillium leaders were optimistic of the community's success, citing the property's location in the burgeoning Pinnacle Peak submarket. The property features a great room that's more than 11,000 square feet, a 27-seat private theater, and an electronic lounge complete with different game systems.