TUCSON MULTIFAMILY MARKET OVERVIEW Q C a p i t a l M a r k e t s P r i v a t e C l i e n t G r o u p

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1 TUCSON MULTIFAMILY MARKET OVERVIEW Q4 21 C a p i t a l M a r k e t s P r i v a t e C l i e n t G r o u p

2 TUCSON MULTIFAMILY MARKET MULTIFAMILY OCCUPANCY & RENTS Gross or face rents among communities with 4 units or more peaked in the Q3 of 28 at $64. They declined steadily to $628 in the Q1 of 21 and have moved up one dollar per quarter to a Q4 21 average of $631. Net rents after concessions dipped to 25 levels before starting to climb again in 21. Rental concessions peaked in the Q2 of 21 at 11.31% dropping to a current level of 1.17%. Rents $66. $64. $62. $6. $58. $56. $54. $52. $5. Q1 25 Q2 25 Q3 25 Q4 25 Q1 26 Q2 26 Q3 26 Q4 26 Q1 27 Q2 27 Q3 27 Q4 27 Gross Rents Net Rents Occupancies peaked in during 26 and have subsequently dropped across all market areas with vacancies reaching peak levels in 29. The hardesthit areas included Southeast, South Central and South /Airport. This decline in occupancy was largely attributable to the state s new undocumented worker legislation as well as a decline in construction employment. A look at historical 4th quarter vacancies shows that occupancies have turned the corner and are improving. Southeast continues to show strong improvement, however there is only one property in this district. The University and Mountain Foothills submarkets, both of which cater predominantly to student renters, also continue to improve. The southern markets continue to show the highest vacancies. Q1 28 Q2 28 Q3 28 Q4 28 Q1 29 Q2 29 Q3 29 Q4 29 Q1 21 Q2 21 Q3 21 Q4 21 Submarket 4Q 5 4Q 6 4Q 7 4Q 8 4Q 9 4Q 1 Marana/Avra Valley Note 1 Note 1 Note 1 Note 1 Note 1 Note 1 Oro Valley/Catalina Northwest Catalina Foothills Northeast East North Central Flowing Wells Mountain Foothills University South Central Pantano/Lakeside South /Airport Southeast AVERAGES Occupancy declines occurred in due to a significant increase in the number of single-family homes, condominiums, and townhomes being rented. Tracking the inventory of single family homes for rent is difficult, however discussions with managers who specialize in single-family rentals reveal that rental home inventory is increasing as a result of continued purchases of foreclosures by investors and additions to inventory from reluctant landlords who for one reason or another have been unable or unwilling to sell their homes at current prices. Interest rates for home loans are very low today, and home prices have dropped over 3% from peak levels making home ownership very competitive with apartment rentals. The number of trustee sale notices in is continuing at a torrent pace of nearly 1, homes per month; nearly triple the levels seen in 27. As a result, competition with single-family rentals and home ownership will remain a factor in the market throughout 21. Improved apartment market fundamentals seem to indicate that multifamily properties are starting to be more competitive. As the single-family inventory stabilizes, the continuing growth of population and households is expected to lead to continued improvement of 2 Multifamily Market Overview

3 apartment fundamentals. Occupancy 1% Economic Physical A review of current inventory shows that only 2,43 units were built in the eight year time frame of 23-21; an average of 34 units per year. An analysis of the type of product built shows that, during this eight year period, an average year of construction would yield 87 low income units, 97 student units, and 12 conventional apartments. 95% 9% 85% 8% 75% 7% Q4 5 Q4 6 Q4 7 Q4 8 Q4 9 Q4 1 MULTIFAMILY PIPELINE 22 marked the last year of any measurable construction of multifamily properties in with over 1,4 units constructed. Since then, multifamily construction has been completely in check, averaging less than.5% of total inventory. There are numerous factors which limit new development including rent levels that often will not support new construction, limited sites zoned for development, physical and governmental development constraints, and severe competition for sites from single-family developers in the years The condo conversions that took place during this time frame reduced total apartment inventory such that inventory has dropped from 64,54 units in Q2 of 23 to 63,64 units in Q4 of 21. Further, the condo conversions were typically higher quality, newer properties. This has created an aging inventory with minimal choices in the upper end market. The supply side of the multifamily equation has certainly not been a major contributor to the high vacancies seen in the market. 8 Year Average Construction by Type Low Income/Subsidized Student Conventional Number of Units Constructed New Units Average Avg % Inventory 96-2 Avg % Inventory 3-1 1,6 2.% 1,4 1,2 1, 1.5% % 6 4.5% % Multifamily Market Overview 3

4 MULTIFAMILY SALES Sales of multifamily complexes slowed in mid-27 as a result of credit market turmoil, and virtually came to a halt in 29. In 26, at the peak of the market, 46 properties with 1 or more units were sold, totaling 11,77 units and selling for $727.2 million. The average price per unit was $61,785 and the price per square foot was $82.In 28, by contrast, only 9 communities 1 units or larger were sold, with a total trade volume of $121.5 million. The average price per unit was $57,153 and the price per square foot was $ saw the sale of one 1+ unit property. This was the La Reserve apartments, 24 units, which sold at a trustee s sale for $14.1 million. 21 Apartment Sales (1+ Units) We saw four 1+ unit sales in through the first half of 21. As predicted, 7 property and 5 property portfolios finally cleared the market during the Q3 of 21. All of these 21 sales were lender driven, either sold after foreclosure or during receivership. The sales are outlined in the table below. Additional receivership/foreclosure properties are coming to market adding to the yearend total of sales. Cap rates are compressing as a result of very low interest rates, leading to investors re-evaluating sale decisions for their current holdings. This will lead to some additional market, non-lender driven sale transactions. Rating Property Name Address Sale Date Year Built Units Avg Unit Size Avg Rent Sale Price $/Unit $/SF B+ Condominiums at Williams Centre 54 E. Williams Boulevard 5/19/ $961 $17,15, $72,59 $76.9 B+ Retreat at Speedway 741 E. Speedway Boulevard 5/19/ $833 $22,5, $74,13 $93.92 B+ Tierra Vida 197 W. Magee Road 5/19/ $78 $15,2, $76, $98.66 B- Tanque Verde 7671 E. Tanque Verde Road 3/25/ $631 $11,4, $26,636 $38.28 B Lakeside Casitas 825 E. Golf Links Rd $739 C Palomino Crossing 75 E. Irvington Rd $546 C Hampton Park 86 E. Olds Spanish Trail $757 C Cordova Village 425 E. 29th St $448 C Solano Springs 624 S. Santa Clara Ave $617 C San Mateo 28 S. Mission Rd $579 C Highland Woods (Sierra Vista) 555 N. 7th St., Sierra Vista $62 7 Portfolio 8/5/ $62 $46,5, $29,693 $45.32 C Summit Ridge 1252 S. Craycroft Rd $549 B La Hacienda 6161 E. Pima St $51 B Pavilions at Pantano 811 E. Speedway Blvd $592 C Sienna Ridge 5353 E. 22nd St $626 C Verrano Park 685 E. Golf Links Rd $397 5 Porfolio 9/14/ $556 $3,4, $22,569 $43.45 Totals/Averages 4, $641 $143,15, $35,6 $ Multifamily Market Overview

5 Multifamily Sales Volume vs Total Number of Transactions $8,, $7,, $6,, $5,, $4,, $3,, $2,, $1,, $ FINANCING & CREDIT MARKETS Sales Volume No. of Transactions Despite home sales volume increasing on a year to date basis both in terms of number of homes sold, and overall dollar volume, listing inventory is increasing and the median price continues to slide. Sales volume has decreased after expiration of the home buyer tax credit program putting additional upward pressure on inventory and downward pressure on pricing. The high inventory coupled with the high foreclosure rate continues to drive home prices down in Pima County. The median single-family home price peaked in November of 25 at $226,465 and continues to fall with the median price reported in December 21 at $139,5. Speculation that 21 could bring another record year of foreclosures held true, delaying the eventual recovery of the single-family market. CBRE Econometric Advisors sees Arizona as a bubble market and anticipates additional correction in housing prices. In contrast to the continued multifamily property receiverships and foreclosures, interest rates are at compellingly low levels for acquisition financing. As of mid October of this year, quotes from FNMA were in the 4.5% range for 1 year term loans at loan to values of 75%. Rates have since climbed to the 5.8% range, still attractive financing. Life companies have also re-entered the market after a pause over the past 18 months. The favorable financing terms are fueling an already competitive acquisition market. TUCSON SINGLE-FAMILY MARKET RESALE VOLUME & PRICES A review of the active listings of single family homes reported from TARMLS is showing a reversal this year of the steady decline in inventory seen since April of 27. Active Listings Reported by TARMLS Average ,463 April 27 1,387 December 29 6,13 December 21 6,859 RESALE AFFORDABILITY The National Association of Home Builders publishes a Housing Opportunity Index measuring the percentage of households that can afford the median priced single-family residence in a given community. From 1998 to 24 the index averaged 64%, a number slightly higher than the national average. As the home market heated up, the index in dropped to a low of 3% in the third quarter of 26 compared to a national average low of 4% during the same quarter. With the recent drop in single-family prices, is once again ahead of the national average as the Housing Opportunity Index in the 3rd quarter of 21 for was 82.3% versus the national average of 72.1%. Strong housing affordability in the near term means continued competition from the single-family market for tenants who are weighing renting against homeownership. However, strong affordability numbers will be attractive to employers, retirees, and others looking to locate in the Southwest helping to fuel the economic recovery. It is likely that the combination of a declining homeownership rate as well as improving household growth will produce the strongest growth in rental demand since the 198s. Multifamily Market Overview 5

6 vs Phoenix Median Sale Price Comparison $3, $25, Phoenix NEW HOME ACITIVITY According to analyst John Strobeck, 2,5 new home permits were issued in 29 in the metropolitan area. He reports that activity peaked in 25 at 11,762 permits, and estimates that the permit numbers will be relatively steady until the anticipated new round of foreclosures ends. He estimates a slight increase in permit activity, projecting 2,1 permits in 21; 2,13 permits in 211; 2,2 permits in 212; 2,7 permits in 213; 3,1 permits in 214; and 3,6 permits in 215. There were 1,866 permits in 21 down from 2,77 permits in 29. $2, $15, $1, $5, $ ECONOMIC TRENDS ECONOMIC & DEMOGRAPHIC TRENDS job growth dipped into negative territory in 28 and accelerated downward in 29. The negative slide appears to be reversing itself in 21 with positive job growth expected to return in 211. We are expected to return to peak 27 levels by late 212/early 213. Median sale price for January of each year. Existing Home Sales & Median Home Prices $25, $2, $15, $1, Home Sales Median Home Prices 6, 5, 4, 3, 2, The Pima County unemployment rate was 8.4% in November 21 compared to 9.8% nationwide. Metro unemployment should trend similar to national trends but stay lower than the national average. Even at 8.4%, the local unemployment rate is substantially lower than that for many other Western metro areas, such as San Diego (1.4%), Los Angeles (12.1%), Sacramento (12.6%), and Las Vegas (14.3%). The unemployment rate appears to have peaked in Pima County in July of 21 at 9.2%. It is expected to drop below 6% by 213. A highly skilled workforce, strong university presence, rising employment diversity and continued growth in defense related industries coupled with accelerating population growth and affordable housing will fuel the employment comeback. $5, $ Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q Q1 - February; Q2 - May; Q3 - August; Q4 - November 1, MULTIFAMILY MARKET FORECAST Population in is expected to grow by over 2, in each of the next 4 years. s average household size is 2.5 people. This translates into over 8, new households per year. Approximately 35% of these new households will be renters. The multifamily market will undoubtedly capture a percentage of these 2,8 renter households. absorbed nearly 1,628 units over the 18 months ending December of 21. Construction remains in check. Demand will be the key indicator moving forward. Apartment owners have reduced rents and raised concessions in an ef- 6 Multifamily Market Overview

7 fort to compete for tenants and improve occupancy. Discussions with owners of the largest portfolios in confirm that bottom line revenues have improved on a year-to-date basis compared to last year. By 211, we will have worked through the brunt of the single-family foreclosures, and single-family construction and related employment will be recovering should show steady improvement in market fundamentals with the possibility of significant revenue growth as the improvement takes hold. Population Growth Population % Change Non-Farm Employment Total Non-Farm Employment % Change 1,4, 3.5% 45, 8% 1,2, 3.% 4, 6% 1,, 8, 2.5% 2.% 35, 3, 25, 4% 2% % 6, 1.5% 2, 4, 1.% 15, 1, -2% -4% 2,.5% 5, -6% % % Multifamily Market Overview 7

8 C B R I C H A R D E L L I S Pr i v a t e C l i e n t G r o u p : : W. Michael Sandahl Senior Vice President michael.sandahl@cbre.com : : Angelica Jacobe Client Services Coordinator angelica.jacobe@cbre.com CB Richard Ellis, Inc N Campbell Avenue, AZ Sources for the information provided include the Bureau of Labor Statistics, Association of Realtors, Metropolitan Land Use Study, RealData, Inc. and others. 21 CB Richard Ellis, Inc. The information above has been obtained from sources believed reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to independently confirm its accuracy and completeness. Any projections, opinions, assumptions or estimates used are for example only a and do not represent the current or future performance of the property. The value of this transaction to you depends on tax and other factors which should be evaluated by your tax, financial and legal advisors. You and your advisors should conduct a careful, independent investigation of the property to determine to your satisfaction the suitability of the property for your needs. CB Richard Ellis