Thousands of rental apartments have been turned into condominiums in Phoenix, an apartment market once plagued by concessions and high vacancies. That’s made the apartments left behind into valuable commodities.

Phoenix—At the beginning of the year, the first new apartments opened at Desert Parks Vista at DC Ranch in Scottsdale, Ariz. Four months later, the 202-unit project was 95 percent occupied.

That’s exceptionally fast for any apartment community. But for a community in the Phoenix metro area, which is only now recovering from massive overbuilding in the late 1990s and the downturn that followed, it’s outstanding.

“We think the market is very strong out here,” said Philip Bell, chairman and CEO of the P.B. Bell Cos., which developed Desert Parks. He credits the fast lease-up at his project to a rapid strengthening of the market.

The percentage of vacant apartments in the Phoenix area dropped to 6.3 percent in the first quarter of 2006. That’s a big improvement from 8.2 percent in the first quarter of 2005 and 9.5 percent the year before that, according to information from market research firm Reis, Inc.

Until recently, property managers offered prospective tenants an average of two months of free rent to sign a one-year lease. But as Phoenix’s vacant apartments have filled with tenants or left the rental market to convert to condominiums, managers have shrunk concessions to just “a few weeks on the studios they’re stuck with,” said Terry Feinberg, president of the Arizona Multihousing Association.

“Phoenix has experienced terrific growth in rents,” said Ron Brock Sr., president and CEO of market research firm Pierce-Eislen, Inc. By the end of June, average rents in Phoenix had jumped 8 percent to $732 per month, up from $678 just 12 months before, according to Pierce-Eislen.

That’s a huge improvement from the rent growth of just 1.6 percent the market saw in 2004, which was itself a big step up from the previous two years. Rents here actually dropped by 1 percent in 2003 and 2.5 percent in 2002, according to Reis.

“Phoenix was really hard hit from 2000 through 2005,” said Feinberg.

The North Scottsdale submarket celebrated the most aggressive increase: 11.6 percent in June over the prior year, according to Pierce-Eislen. The far western suburbs submarket suffered the area’s only decline in rents, which fell 3.9 percent in that area.

Condos save the rental market

The apartment market here owes most of its recovery to condominium converters. Beginning in 2004, thousands of apartments were turned into condominiums, including 9,042 units in 2005 and another 1,851 units in just the first quarter of 2006.

As these apartments stopped renting to tenants, many of the people that had lived in them moved into the vacant units at other properties, pushing down the percentage of vacant apartments overall.

The number of new apartments entering the market was not enough to keep up. Developers finished just 3,532 new apartments in 2005, little changed from the 3,557 they finished in 2004 and 3,374 in 2003, according to Reis, Inc.

Phoenix’s total inventory of apartments dropped from a high of 252,033 units in the third quarter of 2004 to just 244,712 units by the first quarter of 2006.

Even as a shrinking supply pushed occupancy rates higher, the absolute number of occupied apartments remained fairly steady as some renters left their apartments to move into new condominium units. The number of occupied units held steady last year and fell by 974 units in the first quarter of 2006, according to information from Reis, Inc.

That could suggest that apartment demand won’t be strong enough to absorb more units as condominiums find their way back to the rental markets now that the condominium boom is slowing down.

Fortunately, Phoenix has a diverse, growing local economy that added more than 100,000 new jobs in 2005, according to Department of Labor statistics.

And the supply of new apartments coming to Phoenix is low compared to the city’s history. In 1999, production was more than twice what it’s been in recent years, as 8,524 apartments opened their doors.

Local experts think overbuilding like that will never come to Phoenix again. Land is becoming scarce because so much of the desert around the city is government-owned or otherwise protected from development.

“The days of massive swings to oversupply from overbuilding are gone for Arizona,” Feinberg said.

Sales ticker

The boom in condominium conversions has also boosted the market for apartment properties here, as converters paid top dollar for promising buildings earlier this year.

Many of these condominium converters are now no longer bidding, as demand for their product has softened. But prices were still inching up as rental apartment operators and speculators took up where the condominium converters had left off, according to local experts. “There’s been no reduction in price,” Brock said.

The price of a Phoenix garden apartment community jumped by nearly a third, to an average of $85,000 per unit, in the first quarter, with an average capitalization rate of 5.8 percent. A cap rate represents the net operating income of a property as a percentage of the sales price. That’s up from an average price of $61,000 in the first quarter of 2005, with an average cap rate of 6.9 percent, according to information from Real Capital Analytics.

Prices were even higher in Phoenix for high-rise properties, though there are very few tall buildings to choose from in this sprawling city. Only six high-rise apartment properties sold over the 12 months ending in March, compared to 223 garden apartment properties.