Ridgestone Apartments in Phoenix, Arizona. Source: flickr.com/arancidamoeba

When the housing bubble burst, Arizona and Florida were some of the hardest-hit states, with real estate prices plummeting and new construction grinding to a halt. But even as vacant properties continue to litter the landscape, some developers are seeing promise in multifamily rentals.

Years of slow construction, tight mortgage financing, and falling and stagnant home prices have combined to boost the rental apartment market in a region known more for its sprawling suburban single family homes, and developers are taking notice.

Denver-based apartment giant Archstone is planning a 380-unit complex in Chandler, Ariz., and is reportedly looking at over a dozen sites in the state's largest cities. Scottsdale-based MC Companies has also formed a joint venture with Phoenix-based Clark-Wayland Construction to develop buildings in Phoenix and Tucson, with over three hundred units set to lease up between two complexes in Tucson in mid-2012.

Real estate investment trusts (REITs) with apartment assets across the Sunbelt have also been on a roll, riding a nationwide trend towards apartments and rentals. Memphis-based Mid-America Apartments posted record funds from operations (a commonly used REIT performance metric) in the fourth quarter of 2011, and Atlanta-based Post Properties has been getting lots of praise from investment analysts lately.

According to Ron Witten, founder of Dallas-based Witten Advisors, while the hard-hit Sunbelt markets in Arizona and Florida are not leaders in multifamily nationwide — that honor goes to large coastal cities cities like New York, D.C., Seattle, and San Francisco — relative to where they were a few years ago, the uptick is noticeable.

There's probably less of a pick-up [in Arizona] as there is in the Florida market — South Florida and Tampa would be the most active — but Phoenix would be more active than anywhere else in Arizona, Witten said.

As for the Florida markets, Jay Hiemenz, chief financial officer at Phoenix-based Alliance Residential Co., said that South Florida has the clear advantage over the northern and central areas of the state (aside from Tampa, which he also cited as strong), with Broward County doing well within South Florida, along with well-off areas of Miami like Coral Gables.

Most of the new projects are more urban in nature than the single-family homes that sprawled across the desert during the housing bubble. Public transit is limited in Arizona, but Ross McCallister, principal at MC Companies, said that primarily what we look for is easy access to employment centers, easy access to freeways — areas where the services already exist and the residents don't have to go too far to work, eat, get groceries, etc. They're not primarily suburban locations, they're more urban locations.

Hiemenz echoed these sentiments, saying that recovery is strongest in close-in locations, as opposed to the suburban projects that were the darlings of builders and investors before the real estate crash. As for building type, Hiemenz described the projects being funded now as a kind of moderate density — denser than wood-frame two- and three-story suburban garden apartments surrounded by surface parking lots, but not quite as dense as the high-rise projects that characterize big coastal cities and downtown markets.

What we're doing mostly is stick frame construction, said Hiemenz, whose company does multifamily projects across the Sunbelt, but with structured parking, which means we'll build a garage and wrap projects around it — we call it 'wrap-around.' Or, the other thing we're doing a lot of is podium-style development, where you're building a parking garage that's partially subterranean, with units on top of it. With that, as you can imagine, you can get a higher unit count in some of these urban locations. We've done high-rise in the past, but more than 90 percent of the projects we're working on now would fall into one of the two categories mentioned.

But with more infill development, McCallister says, come more regulatory hurdles. A lot of the communities are becoming more and more difficult to work with in terms of the entitlement process itself, McCallister said, with the lack of infill sites also being a problem for developers. The process itself is just becoming much tougher.

Hiemenz acknowledged that infill development, which is often redevelopment of existing properties, encounters more neighborhood resistance than suburban, greenfield projects, but emphasized that the entitlement process they encounter in the Southwest, which lasts about a year from conception to permits, is still much easier and quicker than in coastal California and Washington, D.C., where it can take as long as three years to receive the necessary planning permission.

As for the future of the multifamily sector in the Sunbelt, McCallister was uncertain. We're seeing a fundamental shift in the interest and ability of people to get homes. But will it last? Who knows. We hope it does. But when house prices rebound and constant price appreciation comes back, he said, I think people will forget about [the crash] and get back into [homeownership and speculation] again. I think purchasing a home will still be one of our biggest competitors.

Source: Witten Advisors, U.S. Department of Commerce.

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