<a href=Phoenix's 724-unit Trillium Pinnacle Peak seeks stabilization some time in 2010.Photo: Trillium Residential">

Phoenix's 724-unit Trillium Pinnacle Peak seeks stabilization some time in 2010.Photo: Trillium Residential

When it comes to big, luxurious apartment communities, the brand new Trillium Pinnacle Peak has it all. The 724-unit, Class A community features an 11,000-square-foot “great room” clubhouse; a chef's demonstration kitchen; a spinning room; a yoga and Pilates studio; a 27-seat private cinema; an electronic lounge complete with flat screen televisions and Xbox, Nintendo, Wii, and PlayStation units; two resort-style swimming pools; and a Zen meditation garden. “It is simply a beautiful property,” says Trillium principal Dave Dewar. “We're differentiating ourselves and we're excited; we're bullish.” Bullish enough that Pinnacle Peak isn't even phasing in lease-ups. On September 2, the entire property opened the doors to great fanfare as the largest multifamily community to come online in its market in two decades.

That market happens to be Phoenix, where annual employment growth is down, apartment vacancies are averaging between 9 percent and 12 percent, and developers—while significantly cutting back—are still planning to pull 3,800 multifamily units out of the ground this year, according to data provided to the Arizona Multihousing Association by Encino, Calif.-based commercial real estate investment services firm Marcus & Millichap. Throw in record numbers of condo reversions and a single-family shadow market thought to be one of the worst in the country, and Phoenix is shaping up to be a poster child for what market experts say could become an unfortunate national multifamily absorption phenomenon.

Even in hot markets such as Dallas, absorption is failing to keep pace with net move-outs and new multifamily product coming online. “I do think we are in a situation where the market is struggling a little bit more than people realize,” warns Greg Willet, head economist and vice president of research and analysis for Carrollton, Texas-based apartment market research firm M/PF YieldStar. “I think operators are feeling it and getting a handle on it, but the people who are not down there in the trenches don't realize that we've had softening to the degree that we've had.”

THINK GLOBALLY, RENT LOCALLY

In fact, M/PF YieldStar analyses show absorption to be either down or flat in virtually every market across the country. Bright spots include Raleigh, N.C., San Antonio, and Seattle, but “even in those areas, you are talking about maybe just 1,000 or so total units being absorbed,” says Willet, who adds that he believes the size and impact of the shadow market are being underestimated by many multifamily operators.

John Stone, a principal for Clearwater, Fla.-based Colliers Arnold, a division of Colliers International, agrees that shadow rentals are significantly impacting multifamily real estate. He reports that, in general, Colliers brokers across the country are seeing the beginnings of absorption difficulties that historically have taken years to correct. “We had this problem in the '70s, and we had it right after the 1986 Tax Act when people were building apartments and didn't care if they were occupied or not,” Stone says. “The next thing you knew, you had 15 percent vacancies that didn't stabilize for five years. But they get absorbed. They always do.”

Both Stone and Willet emphasize that while absorption is becoming a prevalent issue nationally—as well as in some regional markets—intelligent operators will still find significant neighborhood-by-neighborhood variances that offer opportunities to shrewd investors and builders alike. In particular, as unemployment continues to trend upward to more than 6 percent nationally, property managers and developers who focus on assets closer to local employment centers—or the transit hubs that access them—stand to benefit.

That strategy is finding traction with players in rental markets that have been hit hardest by condo reversions and shadow market stock. “In Florida, vacancies are upticking on the average, but our downtown urban infill markets still have strong occupancies and rent growth,” says Phillip Smith, vice president of residential for Charlotte, N.C.-based multifamily owner and developer Crosland. “You have to find the locations that are closest to jobs and restaurants and shopping and build the very best product that you can build and then operate that project better than anyone else. It is fundamental real estate development right now.”

Likewise, Dewar says Pinnacle Peak—like virtually all of Trillium's Phoenix properties—is powered by neighborhood-level fundamentals that include a dearth of rental supply and an abundance of nearby retail, transit, entertainment, and anchor employers. Within 5 miles of Pinnacle Peak, major employers include Honeywell, American Express, USAA Insurance, and the headquarters for PetSmart and Best Western. “We're not crazy,” Dewar says. “The Phoenix metro gets painted with a pretty broad brush that is not indicative of our submarkets. The fundamentals of infill in Phoenix are some of the strongest we have seen in a long time, and being next to job-concentrated areas like we are, we are pretty confident.”

Pinnacle Peak's leasing velocity will ultimately define that confidence. Trillium principals plan to look at Phoenix absorption rates one day at a time and expect that a pace of one or two daily leases will stabilize the asset within two years. According to Dewar, the current rate of sign-ups is right on that target. “We've done a lot to differentiate ourselves from our competitors,” he says. “And the initial reaction has been phenomenal.”