The low-cost (Class C) apartment market in Tucson has taken a dramatic nosedive over the past six months, and the bottom line appears to provide positive proof that the state’s new employee sanctions law that went into effect in January is having a major impact.
Data from Marcus & Millichap, a major national real estate investment firm with an office here at 6083 E. Grant Road, suggests that the Legal Arizona Workers Act appears to have ended employment — and Tucson residency — for many undocumented immigrants.
 Tucson’s apartment market has changed dramatically in the past six months.Joe Pangburn photo |
Under the new law, employers with unauthorized workers could have their business licenses suspended for up to 10 days and be put on probation for a first offense. A second offense could lead to a revocation of the license.
Class C apartment units are those with older construction and varying degrees of deferred maintenance. Class C units are most often in areas where family incomes are below the city’s median income of around $37,000.
Just six months ago, the Tucson apartment market was looking as hot as it had looked in 15 years, said Mike McClain, vice president of investments and senior director of Marcus & Millichap’s national multihousing group. He said occupancy rates last fall were as high as 96 percent. Even if an apartment remains vacant for just two weeks during the year while being prepared for a new renter, McClain pointed out, its occupancy rate would be 96 percent.
In fact, a national Marcus & Millichap apartment report prepared six months ago rated Tucson as the ninth-hottest apartment market in the country, up eight places from the previous year. In that report, Marcus & Millichap cited "minimal completions (of new construction), declining vacancy and strong rent growth."
Now, a half-year later, data put Tucson in the bottom 10 of 40 apartment complex markets. McClain said that Class A and Class B apartment units — newer and more pricey rentals — are continuing to do well in Tucson, staying over 90 percent occupied. But Class C units — less-expensive housing more likely to be rented by undocumented workers — now have vacancy rates of 25 percent to 30 percent.
The report from six months ago projected a 1.7 percent increase in job growth (6,600 new jobs). In reality, jobs have declined in Tucson by about 1 percent in the past six months (3,800 jobs lost), according to Marcus & Millichap. But McClain doesn’t believe those declines can explain the change in the Class C apartment market here.
Another factor could be that more people are renting single-family homes that are available because investors hoping to flip them are having to forfeit or rent them. But McClain doesn’t believe that adequately explains this sea change in the apartment market, either.
A final possible factor, he said, is the construction of federally financed "portable housing" — low-income units built using tax-credit incentives. But he said most of these units are not rented by undocumented workers, because renters must provide lots of documentation to qualify.
The only logical conclusion for the big decline in Class C occupancy, he said, is the departure of undocumented workers.
Higher apartment vacancies — many in the city’s southside — began last October and November, just before the new law took effect, McClain said. He believes the law gave employers, already facing tough economic times, particularly in the construction industry, a strong reason to lay off undocumented workers. Many of those employers, he believes, were subcontractors.
Apartment complex sales have slowed during the past six months as well. Marcus & Millichap data show that so far this year, there have been just seven sales of Tucson complexes with more than 40 units totaling $51 million. There were 40 sales of complexes with more than 40 units in 2007 totaling $489 million. In 2006, there were 62 sales totaling $775 million, and in 2005, there were 65 sales totaling $602 million.
McClain, who has extensive experience in the Tucson market, predicts it could be three to five years before the city’s apartment market rallies — and only if there is little or no apartment construction.
Despite the gloomy apartment data, Marcus & Millichap information still puts Tucson in the top 10 of 40 markets in overall housing price trends. While prices declined 11 percent here between first quarter 2006 and first quarter 2008, they increased 65 percent between first quarter 2003 and first quarter 2006. Phoenix was sixth on the list, with prices declining 17 percent in the past two years but increasing 82 percent between 2003 and 2006.
Contact reporter Ed Egger at eegger@azbiz.com or (520) 295-4238.
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