Why Is Everyone So Afraid of New Construction in Multifamily?

[Ben Leybovich]

There is a lot of fear of new construction in the multifamily sector. I am not sure I understand why. I think we can use it to our advantage.

@Sam Grooms and I buy apartments in Phoenix. Statistically, considering the demographics, it is thought that Phoenix will need 150,000 new apartment homes by 2030. Currently, there are about 15,000 in the pipeline. The construction costs are up tremendously. Construction volume is also capped by a shortage of skilled labor, as much as anything else. Even if we wanted to build 50,000 units in the next 2 years, we can’t.

So, how do we use this to our advantage?

We just closed on another community. This is a 94-unit community a block away from downtown Mesa. This location is designated a QOZ, and as such a ton of new construction has already broken ground, and a lot more is planned. The community sits right on top of the light rail, with the station right at the corner. Sun Crest backs up to the amazing Pioneer park that the city just spent $8M renovating.

The downtown Mesa is in midst of a fantastic revitalization, and we believe within a few years it will become a hub! Especially considering the ASU expansion that is coming in.

Talk about the Path of progress!

This was a smaller acquisition for us, but we couldn't pass up the growth prospects. We paid $10.6M and we will complete a $3M renovation scope, which will include the construction of a new office and gym, expansions of the pool and a bark park, as well as the typical for us interior scope which includes cabinets, granite, appliances, and W/D install.

Here’s the kicker:

New construction in Phoenix rents for an average $1,500 per month. In this location, looking at the filed permits, I think many of the rents will be North of $2 sq.ft with an average per unit of at least $1,700 - $1,800.

Our re-positioned average pricing is $1,200. These units are large, so this pricing equates to $1.30 per sq.ft.

So - what we have is a community that will offer 85% of what new construction offers in terms of location, finishing surfaces, and amenities, but at 65% of the cost, or less. It will become the budget-friendly option for anyone wanting to be in what will become a trendy location in the East Valley in one of the hottest growth markets in the country. It will offer tenants much of what Class A will, but at a large discount.