Rental Housing Journal Arizona December 2015 by Professional Publishing, Inc

Rental Housing Journal Arizona

December 2015 - Vol. 7 Issue 12

2. Flipping Edges Out Renting As The Preferred Investing Strategy

7. How to Dodge a Tax Hit When Selling Rental Property

5. Phoenix Apartment Research Report

9. Ask the Secret Shopper – ‘Tis The Season to be Jolly

Will 2016 Be a Super El Niño Year?

10. 4 Reasons Why Women Will Lead the Business World in the 21st Century

WWW.RENTALHOUSINGJOURNAL.COM • PROFESSIONAL PUBLISHING, INC Monthly Circulation To More Than 7,000 Apartment Owners, Property Managers, On-Site & Maintenance Personnel

The Top Amenity Trend in 2016 for Today’s Tech-Savvy Residents:

3Q15 Market Overview

Property-Wide WiFi

Multifamily Housing Update

Part I of III

Payroll Job Summary Total Payrolls Annual Change RCR FY15 Forecast RCR 2016 Forecast RCR 2017 Forecast RCR 2018 Forecast RCR 2019 Forecast Unemployment (NSA)

1,884.3m 51.4m (2.8%) 52.1m (2.8%) 48.2m (2.5%) 55.3m (2.8%) 53.7m (2.7%) 44.5m (2.2%) 5.5% (Sept.)

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3Q15 Payroll Trends and Forecast Phoenix’s improving residential real estate market and growing population fueled faster hiring in construction and financial services, boosting overall job growth from a 49,700-job, 2.7% yearon-year rate in 2Q15 to a 51,400- job pace in the third quarter. The foregoing industries expanded at 12,400-job, 4.8% annual rate, up from 10,100 jobs in the prior quarter. Stronger hiring also was recorded in the hotel and food services subsector, where establishments hired at a 5,700-job, 3.4% pace, a substantial increase over 2Q’s 2,700job, 1.6% performance. Seasonally-adjusted data also recorded faster growth. This series noted a 12,300-job net add during the July to September period after the economy created only 9,400 jobs during the first six months of the year. continued on page 3

By Eric Markow

ith widespread technology use by residents of all ages and the rise of the Millennial generation, property-wide WiFi, Gigabit speeds, WiFi calling, and smart home features are what’s next in technology trends for apartments in 2016. Rental properties have to provide the technology amenities the market demands, starting with high-speed, reliable internet

service. Apartment living is evolving because of shifting population dynamics. With 77 million tech-savvy Millennials (ages 18-36) entering the apartment market, they are transforming the demand for technology-oriented amenities in both private and shared residential spaces. It’s not hard to see why Internet is the No. 1 desired technology-based amenity today. In addition to

attracting droves of new residents, new technologies actually have the potential of opening up untapped ancillary income for owners. High speed access to the internet for information and entertainment is an integral part of the lives of more and more Americans, but especially the continued on page 4

Arizona Needs to be More Like Utah

By Michael Coretz

orporate site selectors like Arizona, but other measures show Utah doing something better to close deals.

What can Arizona economic development oﬃcials learn from Utah? We at Commercial Real Estate Group of Tucson ask because a commercial real estate industry magazine recently put the two states close together in an important ranking. Yet Utah is tops in other studies that measure business-friendly states. If Arizona leaders can find out what makes us different from Utah, maybe we can pump up our economic development, too. That can only help in attracting site selectors looking for Arizona and, especially, Tucson industrial, retail and office space. Site Selection magazine puts Arizona 17th in its 2014 rankings of the best busi-

ness climates among states. That pretty much matches other recent rankings, including the Pollina Corporate Top 10 Pro-Business States for 2014 (19th) and Forbes magazine’s “Best States for Business” list for 2014 (22nd). Utah, in comparison, is at the top of both the Pollina and Forbes lists. Yet it ranks 14th in the Site Selection poll, a mere three spots ahead of Arizona.

Advertise in Rental Housing Journal Arizona Circulated to over 10,000 apartment owners, on-site and maintenance personnel monthly Call 503-221-1260 for more information

We like the Site Selection rankings because it includes a survey of corporate site selectors, the people who actually deal with government officials when considering where to expand, move or open their companies. Their opinions make up 50 percent of the points awarded for the rankings. continued on page 10

Rental Housing Journal Arizona

Flipping Edges Out Renting As The Preferred Investment Strategy For The Fourth Consecutive Quarter According To Auction.com Real Estate Investor Activity Report™ Price appreciation and inventory constraints continue to dictate investor strategy in the second half of 2015

uction.com, LLC, the nation’s leading online real estate marketplace, today announced the findings from its Third Quarter 2015 Real Estate Investor Activity Report™, a nationwide survey of real estate investors bidding on properties offered for auction during the respective period. Survey data collected from investors bidding on property online and at live events across the country reveals that flipping is still the preferred investment strategy among investors, edging out the hold-to-rent strategy for the fourth consecutive quarter – and since Auction.com began tracking the split in investor intent. “Rising prices and extremely limited inventory make a nearly ideal environment for real estate investors who want to buy, fi x and flip properties, and that is precisely where we are in today’s market,” said Auction.com Executive Vice

President Rick Sharga. “But record occupancy rates in the rental market also present opportunities for investors who find moderately priced homes they can rent out at a reasonable rate of return, so it’s not surprising that we’re continuing to see buy-and-hold investing activity in the Midwest and Southeastern states.” Although Auction.com’s findings for the third quarter reveal a propensity toward flipping among investors overall, investor intent varies considerably by the type of auction (live event versus online auction) and investor profile. Survey respondents who indicated that they were making a one-time purchase clearly preferred a hold-to-rent strategy, while respondents identifying themselves as full-time “real estate investors” and those indicating that they were working on behalf of another investor strongly favored flipping.

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1) The pet(s) shall be on a leash or otherwise under tenant’sGarbage control Cans when it is outside the tenant’s dwelling unit. TV Antenna/Cable 2) Tenant(s) shall promptly pick up all pet waste from the premises promptly. 3) Tenant(s) are responsible for the conduct of their pet(s) Fireplace at all times. 4) Tenant(s) are liable for all damages caused by their pet(s). 5) Tenant(s) shall pay the additional security deposit listedCleanliness above and/or their rental agreement as a condition to keeping the pet(s) listed above. 6) Tenant(s) shall not allow their pets to cause any sort of disturbance or injury to the BEDROOM other tenants, guests, landlord or any other persons lawfully on the premises. 1 7) Tenant(s) shall immediately report to landlord any typeWalls of damage or injury caused by their pet. Windows 8) This agreement is incorporated into and shall become part of the rental agreement exe -cuted between the parties. Failure by tenant to comply with any part of this agreement Blinds/Drapes shall constitute a material breach of the rental agreement. _____________________________ Landlord

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Flip 27.8% 55.1% 67.6% 53.7%

Rent 68.7% 43.3% 31.9% 45.1%

Undecided 3.5% 1.1% 0.5% 1.2%

Investors bidding at live events appear to be far more likely to flip the properties they purchase based on survey responses collected in the third quarter of 2015, with respondents indicating a preference toward flipping over holding to rent in every state where Auction.com conducted live events.

Q3 2015 Live Event Investor Data: Intent of All Investors Surveyed State Arizona California Georgia Idaho North Carolina Nevada Tennessee Texas Washington Nationwide

Flip 59.8% 67.5% 53.2% 71.6% 54.9% 87.4% 69.5% 56% 73.8% 62.4%

Rent 40.2% 32.5% 46.8% 28.4% 45.1% 12.6% 30.5% 44% 26.2% 37.6%

Undecided 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

Conversely, responses given at online auctions in the third quarter of 2015 show that investors bidding online generally intend to hold the properties they purchase. This was true in every region except the Northeast, which experienced a swing toward flipping in the second quarter due to the region’s inventory constraints and higher purchase prices negatively impacting rental property returns.

Q3 2015 Online Investor Data: Intent of All Investors Surveyed Region

Flip

Rent

Undecided

West Midwest South Northeast Nationwide

45.8% 41.3% 38.6% 52.7% 43.3%

51.8% 56.6% 58.1% 45.5% 54%

2.4% 2.1% 3.3% 1.8% 2.7%

Less active investors (those indicating that they purchase one or fewer properties per year) demonstrated a strong preference for renting properties, while flipping was prevalent among investors who purchase multiple properties per year. This preference appears to be growing among investors purchasing more than 50 properties per year: nearly 68 percent of respondents in this group favored flipping in the third quarter – up from 62 percent in Q2 and 54 percent in Q1.

Q3 2015 Investor Data: Intent By Purchase Profile Purchase Profile 0-1 Property/Year 2-49 Properties/Year 50+ Properties/Year

Flip 37.3% 58.8% 66.7%

Rent 60.1% 40.4% 33.3%

Undecided 2.6% 0.8% 0%

About Auction.com:

Auction.com, LLC, is the nation’s leading online real estate marketplace. Founded in 2007, the company has sold more than $32 billion in residential and commercial real estate assets. Auction. com has over 900 employees and headquarters in Irvine and Silicon Valley, Calif., as well as offices in key markets nationwide. Visit www.auction.com for more information. SOURCE Auction.com, LLC

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Pursuant to RCW Doors/Woodwork 59.18.150, this is your Walls 48 hour entering the dwelling notice that your la Locks landlord or their agents unit and ______________________ premises located at (Address) will be Windows Ceilings ______________________ ______________________ Blinds/Drapes Electrical Outlets ____________ on between the hours Rods of Garbage Cans (Date) and . (Time) Floor TV Antenna/Cable (Time) The entry will occur for the Light Fixtures Fireplace ______________________ following purpose: ___________ Cleanliness Doors/Woodwork___________ ______________________ _________________________________ ___________ ______________________ Locks ______________________ _ _ BEDROOM Ceilings

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arizona, alaska, california, colorado, delaware, florida, georgia, illinois, indiana, kansas, kentucky, massachusetts, nevada, new Jersey, new york, north carolina, ohio, oregon, pennsylvania, texas, utah, washington, washington d.c., west virginia & more.

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CIRCULATED TO OVER 10,000 APARTMENT OWNERS, ON-SITE AND MAINTENANCE PERSONNEL MONTHLY Rental Housing Journal Arizona · December 2015

Rental Housing Journal Arizona

3Q15 Market Overview ...continued from page 1 RED Research specified an econometric forecasting equation for Phoenix employment using U.S. payroll and GDP growth, and metro income and home price changes as independent variables to achieve a 98.0% adjusted-R2 (SE= 0.5%). Based on the macroeconomic forecast displayed on Page 3, the model foresees healthy job growth in Phoenix, with annual net point estimates in the 40,000 to 60,000 range through 2019. Growth is expected to slow to about 20,000 jobs in the forecast out-year (2020) as the U.S. economic expansion gives way to near recession. Occupancy Rate Summary Occupancy Rate (Reis) 95.3% RED 50 Rank Annual Chg. (Reis) RCR YE15 Forecast RCR YE16 Forecast RCR YE17 Forecast RCR YE18 Forecast RCR YE19 Forecast

31sh +0.3% 95.2% 94.9% 95.1% 95.1% 94.8%

3Q15 Absorption and Occupancy Rate Trends Phoenix multifamily space demand was steady over the summer. Tenants leased a net of 1,050 units, according to Reis, comparable to 1,175- and 1,150unit tallies observed during the prior and year-earlier quarters, respectively. At the same time, Reis added 2,026 units to the Phoenix inventory, the largest one-quarter add in six years. Occupancy slipped 40 basis points sequentially as a result but remained 30 bps above the comparable period of 2014. Occupancy levels among 659 stabilized, same-store properties surveyed by Axiometrics were moderately weaker. The average occupancy of this

group was 94.4%, up 80 bps year-onyear. Highest occupancy was observed in the class-B sector (94.5%) for the second consecutive quarter, followed by classes-C (94.3%) and –A (93.7%). Goodyear/ Avondale posted highest occupancy (95.9%) among submarkets, followed by Glendale South and Paradise Valley; Central North (90.7%) trailed. New properties absorbed an average of 18 units/month in 3Q15 after filling 12 in 2Q RCR settled on a simple demand model for this volatile market using the rate of supply growth and the rate of change of U.S. payroll growth as variables (ARS=93.3%, S.E.=0.4%). This model projects net absorption of 5,800 units next year; but supply will exceed this level by about 1,000 units, sending occupancy 40 bps lower to 94.9%. Effective Rent Summary Mean Rent (Reis) Annual Change

$795 4.7%

RED 50 Rent Change Rank RCR YE15 Forecast RCR YE16 Forecast RCR YE17 Forecast RCR YE18 Forecast RCR YE19 Forecast

16th 4.5% 2.4% 2.7% 3.0% 2.5%

3Q15 Effective Rent Trends Reis report that average rents surged $14 (1.8%) sequentially to $795 during 3Q, the strongest quarter-to-quarter gain posted in nine years. Much of the impetus came from the class-A segment, where asking rents rose 1.9% sequentially, outpacing class-B&C assets, which scored a 1.3% advance. Expressed on a year-on-year basis, rents increased 4.7%, placing 16th among the RED 50, highest rank since 2007.

Rental Housing Journal Arizona · December 2015

Same-store, stabilized property rents in the Axiometrics universe enjoyed an 8.0% increase, the fastest hike in at least 10 years. Among properties surveyed by this service, class-C assets notched the strongest gains, rising 9.1% y-oy. The class-A and –C segments posted 6.2% and 8.1% advances, respectively. Two submarkets recorded double-digit growth (Northeast, Sunnyslope), while So. Scottsdale (0.7%) was the only submarket to fail to achieve a 4.5% or faster gain. Notably, concession levels continued to recede, falling to -0.7% of asking rent, down from –1.4% a year ago. RCR kept the rent model simple, using inventory (-), payroll (+) and home price (-) growth as independent variables. The 96.3% ARS (S.E.=0.6%) model projects slowing rents in 2016 due to supply pressure but reacceleration in 2017 when supply abates and job growth regains momentum. Trade & Return Summary $5mm+ / 80-unit+ Sale Approximate Proceeds Average Cap Rate (FNM) Average Price / Unit Expected Total Return RED 46 ETR Rank Risk-adjusted Index RED 46 RAI Rank

31 $912mm 5.1% $94,008 5.9% 37th 3.46 37th

3Q15 Property Markets and Total Returns Investor interest in Phoenix properties did not fade over the summer as sales of 31 properties valued at $5 mil-

lion or more closed from July to September, up from an average of 28 trades during the past three quarters and the greatest trade velocity since the record third quarter of 2014. Gross sales proceeds totaled $912.4mm, representing a 49% increase from 2Q15, and the largest quarterly tally in a year. In all, 9,706 units transacted at an average price of $94,008, consistent with the $94,726 average recorded over the year ended in June. Private equity and other opportunistic investors were well represented among buyers. These investors showed increased willingness to acquire class-B properties with repositioning potential and pre-stabilized assets. Cap rates for assets in the former category were in the low-5s, with pro forma potential to the 6% area. Recent construction properties exchanged hands in the high-4% to low-5% range, with pro forma potential in the mid– to high-5s. Irrespective of the strong bid for Phoenix apartments, RCR elected to maintain a 5.5% purchase cap rate proxy as this is representative of B/B+ pro forma yields. At this level, a terminal cap rate of 6.4% and model derived rent and occupancy point estimates, investors would expect to achieve a 5.9% 5-year total return, ranked 37th in the R46. By Daniel J Hogan

Director of Research djhogan@redcapitalgroup.com 614-857-1416 Oﬃce 1-800-837-5100 Toll Free

continued on page 6

Rental Housing Journal Arizona

Property-wide Wifi ...continued from page 1 trend for 2016 and beyond. Simple steps like installing wall outlet covers with USB ports can be a great starting point. Adding the latest technology amenities converts quickly into increased revenue and retention. And while quality Internet service may not be the only factor in a resident’s choice to move in, your bad Internet service can definitely be a reason they choose a competing property.

millennials who grew up with such services. Dense, bandwidth intensive content such as YouTube videos, movies, and video games is a given for this market. Millennials want to stay connected on their devices anywhere for social media and real-time interactions on platforms like Twitter and Snapchat. Mid-life residents (36-55) are also increasingly heavy technology users. With the growth of telecommuting, more workers are based at home and demand reliable Internet. And seniors aren’t far behind, as they want to use email, Netflix, and other websites, and Skype with their grandchildren. To keep up with this societal trend, more and more properties have discovered that technology amenities have become a critical part of the mix of offerings required to attract and retain residents, especially the swelling ranks of younger residents who grew up computer literate and social media savvy. Apartment hunting priorities for these residents still include affordable price and quality living conditions, but high-speed connectivity has risen to equal importance in and plays a key role in decision making. Most apartment hunters want to know they’ll have powerful and reliable internet connectivity, delivered wirelessly and with plug-and-play simplicity. Smart home

features such as USB ports, and smart phone docking and charging stations round out the complement of technology offerings that will let residents know that your apartment community is the right fit for them. Whether building a new facility or upgrading existing buildings, including property-wide WiFi that offers high speed connectivity for both individual units and in common areas is a growing trend, and is proving to be a “win” for residents and owners/managers at properties around the country. New cutting edge technologies have finally made it easy and affordable to offer WiFi solutions at a high level.

Community Space Technology One of the major trends in apartment, MDU, and condo development in 2015 has been the focus on campus-like spaces, especially for urban communities where per-unit footprint has been shrinking. Designers and builders are creating more upscale lounges, club rooms, technology, fitness, business centers, media rooms, and play spaces so residents can gather socially while remaining connected to the Internet. Millennials in particular use these public spaces for socializing with other residents and guests, or as an extension of their own living space. Implement-

ing the newest technology trends like property-wide WiFi and smart home features allows residents to use these spaces as an extension of their home. Residents can print property wide, turn off their lights from anywhere, adjust their AC on the go, and much more. The perfect solution for a growing number of property owners has been to offer high-speed community-wide Internet service, which a recent survey by the National Multi Housing Council calls “one of the most desired amenities.” More than 70 percent of respondents said that fast, reliable broadband connectivity was either “important” or “very important” in their decision making. Increasingly, apartment communities are installing “bulk Wi-Fi” services and marketing this in-demand amenity as an option to create a new profit center. By eliminating the “big box” cable or DSL Internet companies from the equation, residents receive a superior service at a fraction of the market cost and MDU owners can establish a new revenue source

Conclusion Of all the latest amenities that a property can include, technology access is becoming increasingly crucial in today’s competitive rental marketplace. Highspeed Internet service options that extend from apartment units to community spaces can help set you apart, and don’t have to be an expensive solution to implement; in fact they can bring you untapped profit opportunities. If done right, Property-Wide WiFi, amongst other technologies, are a distinguishing factor for resident loyalty, retention and increased per door revenue. Look for Part II of this three-part Property-Wide WiFi series on in the January issue of RHJ, which will delve more into specific Internet technology options and provide a “how to” on selecting the best community WiFi provider and installer for your property to ensure successful deployment. Part III, appearing in February, will address how to package and market property-wide WiFi and technology amenities to maximize your attraction, retention, and revenue.

ON-SITE-NW SEA

Eric Markow is Chief Technology Officer of Dual Path, a provider of high speed property-wide WiFi services. Dual Path’s customers include MDU and senior living communities who enVALLEY, METRO, ARIZONA joy fast, reliable connectivity, delivered with old-fashioned customer service. Dual Path’s unique revenue generating model allows property owners to leverage their “Internet real estate” to maximize profits, increase resident satisfaction and retention, and increase propModernizing In-Unit Technology erty value. Headquartered in Phoenix, Arizona, Dual Path offers property-wide WiFi, Gigabit Amenities Internet and WiFi calling solutions to properTo keep up with tech-savvy residents, ties and businesses coast to coast. For more inmodernizing rental units to include ad- formation, visit www.dualpath.net or contact ditional technology features are a key 1-800-468-6851.

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Rental Housing Journal Arizona · December 2015

Rental Housing Journal Arizona

Will 2016 be a Super Phoenix Apartment Research Report El Niño Year? By Jerry L’Ecuyer and Frankie Alvarez of Dear Maintenance Men

e have been living with drought in the Western United States for a long time now. So the prediction of a strong, wet El Niño year is quite appealing. Will it fill our reservoirs, recharge our aquafers, and bring us back to normal? Hard to tell; many experts say we may need multiple years of El Niño to be back to predrought conditions. First a short explanation by some of the experts as to what an El Niño condition is. An El Niño is a weather pattern produced by unusually warm ocean temperatures in the Equatorial Pacific. The El Niño phenomenon is associated with extreme weather around the globe and in California it typically means a wet winter with higher than normal rain levels. As early as last spring, the National Oceanic and Atmospheric Administration (NOAA) was predicting a 60 percent chance that the El Niño conditions will continue all year. Now that we are much closer to the end of the year, the experts are predicting closer to 100% that 2016 will being a strong or super “El Niño” year. Dr. Dough Gillham a Meteorologist, PhD tells us: “We are in the midst of a rapidly strengthening El Niño event which will likely peak later in fall as one of the strongest El Niño events on record.” El Niño has a reputation for bringing mild winters to much of the country, especially across the northern States. The two strongest two El Niño events on record prior to this year (1982-83 and 1997-98) were quite mild from the Pacific Northwest to the Northeast. Only the Southwestern States saw below average temperatures during those winters. However, a review of other El Niño winters shows that a strong El Niño does not guarantee a mild winter. A unique feature of the upcoming winter compared to other strong El Niño winters of the past is the expected persistence of the warmer-than-normal ocean-water temperatures south of Alaska. Some have referred to this feature as “the Blob” and it has been a key contributor to the dominant weather pattern across North America for the past two years. This pattern has been associated with extended periods of warm and dry weather in the West and two of the coldest winters in recent

memory further to the east, especially in the Great Lakes and Northeast. If “the Blob” does indeed persist through the upcoming winter, then the threat for a cold conclusion to winter in the East will increase. Now that we know what an El Niño weather condition is, how do we prepare for El Niño? First order of business is to take a long hard look at your apartment building and surrounding property. Inspect your building’s roofs, gutters, drains, flashing and trim overhanging trees. In other words, don’t wait for it to be raining to find out your roof is in poor condition. Get the work done now while it is dry and the roofing companies are not busy. Don’t forget about large trees that hang over your roofs. In wet windy weather, they can cause a lot of damage to a roof if a limb breaks or a tree falls because of soggy soil. Flat roofs are especially vulnerable to blocked scuppers and roof drains. The backed up water will find the slightest weakness in any roof system and may even cause a roof to collapse. Make sure the landscaping around your property is designed to drain away water quickly. Connect downspout extenders at the ground level. The extenders will direct water away from the building. Check for stucco cracks. A surprising amount of water can be sucked into a building because of damaged stucco. Clean out window weep holes to stop water from finding its way through window frames and damaging interior walls. If you have wooden garage doors, check that the doors are painted or sealed and that the springs are in good order. The garage doors can get quite a bit heavier when wet or allowed to soak up water. A little bit of preventive maintenance now will save both you and your residents a lot of discomfort later. And last but not least, don’t forget to turn off your sprinklers.

Phoenix Metro Area, Fourth Quarter 2015

owntown Phoenix Revival Spurs Apartment Operations Job growth is intensifying formation of new households in the Valley, supporting the lowest vacancy rate during the recovery thus far. Employment sits near levels not recorded since the prior economic peak, encouraging population growth and the development of new households. Companies such as Uber are taking up new office space downtown and a number of tech firms are opening to the east, including Zenefits, which plans to hire 700 workers by year end. While companies expand metrowide, the passing of the light-rail construction plan will also provide fuel for development with new east-west routes in north and downtown Phoenix. Builders will have options along the route and planned stops close to employment centers, retail hubs and educational institutions, including the state Capitol, Grand Canyon University, ASU West and Metrocenter Mall. Residents also seek units near professional and tech jobs both downtown

Com peti Pric tive ing

and in Scottsdale and other eastern suburbs. Developers are responding with heightened apartment construction in these areas, though demand remains considerably stronger than deliveries. While a few submarkets face headwinds from supply additions, overall vacancy remains tight and will slide lower by the end of the year, pushing rents upward. Phoenix’s strengthening apartment operations are lifting revenues for owners and attracting additional buyers to the metro. A shift in demand for a livework-play lifestyle recently altered rent growth to Central Phoenix from Scottsdale and Tempe, which still have some of the metro’s highest rents. Cap rates for apartment properties trading hands downtown ranged in the mid-6 percent area, with a handful at 5 percent or lower depending on age and location. Properties off Camelback Road can trade 50 basis points lower than the core, while assets in Tempe can provide first-year returns that are nearly 100 basis points continued on page 11

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Rental Housing Journal Arizona

MARKET MARKET OVERVIEW OVERVIEW ||| 3Q15 3Q15 ||| PHOENIX, PHOENIX, ARIZONA ARIZONA MARKET OVERVIEW 3Q15 PHOENIX, ARIZONA

3Q15 Market Overview ...continued from page 3 Phoenix Phoenix Effective Effective Rent Rent Trends Trends Phoenix Effective Rent Trends

Sources: Sources: Reis, Reis, Inc., Inc., Axiometrics Axiometrics and and RCR RCR Forecast Forecast Sources: Reis, Inc., Axiometrics and RCR Forecast

YoY YoY Rent Trend YoYRent RentTrend

10% 10% 10% 8% 8% 8% 6% 6% 6%

4.7% 4.7% 4.7%

4% 4% 4%

0% 0% 0%

3.1% 3.1% 3.1%

2012 2012 2012

2013 2013 2013

4.4% 4.4% 2015f 4.4% 2016f 2015f 2016f 2015f 2016f

2014 2014 2014

8% 8% 6% 6% 4% 4%

4.5% 4.5% 4.5%

2% 2% 2%

10% 10%

RED RED 46 AVERAGE RED 46 AVERAGE PHOENIX AXIOMETRICS SAME-STORE PHOENIX PHOENIX AXIOMETRICS SAME-STORE PHOENIX (REIS/RCR) PHOENIX PHOENIX (REIS/RCR)

2017f 2017f 2017f

3.0% 3.0% 3.0%

2.7% 2.7% 2.7%

2018f 2018f 2018f

2019f 2019f 2019f

2.5% 2.5% 2.5%

2020f 2020f 2020f

2% 2% 2% 0% 0% 0%

YoY YoY Growth Growth Trend Trend YoY Growth Trend

YoY YoY Growth Trend YoY Growth Trend

Phoenix Home Price Trends Phoenix Home Price Trends

24% 24% 20% 20% 16% 16% 12% 12% 8% 8% 4% 4% 0% 0% -4% -4%

Source: S&P Case-Shiller and FHFA Home Price Indices and RCR Forecasts Source: S&P Case-Shiller and FHFA Home Price Indices and RCR Forecasts

5.4% 5.4%

U.S. FHFA HPI U.S. FHFA HPI

2012 2012 2012

4% 4% 4% 3% 3% 3% 2% 2% 2% 1% 1% 1% 0% 0% 0% -1% -1% -1% 2012 2012 2012

2013 2013 2013

2014 2014 2014

7.3% 7.3%

9.4% 9.4%

8.7% 8.7%

PHOENIX FHFA HPI PHOENIX FHFA HPI

2015f 2015f 2015f

2016f 2016f 2016f

2017f 2017f 2017f

6.8% 6.8%

4.8% 4.8%

PHOENIX S&P C-S HPI PHOENIX S&P C-S HPI

2018f 2018f 2018f

2019f 2019f 2019f

2020f 2020f 2020f

Phoenix Payroll Employment Trends Phoenix Payroll Employment Trends Phoenix Trends Source: Payroll BLS, BEAEmployment Data, RCR Forecasts Source: BLS, BLS, BEA BEA Data, Data, RCR RCR Forecasts Forecasts Source:

2.8% 2.7% 2.8% 2.7% 2.8% 2.7%

2013 2013 2013

US GDP GROWTH US GDP GROWTH US GDP GROWTH

2014 2014 2014

2015f 2015f 2015f

2.6% 2.6% 2.6%

US JOB GROWTH US JOB GROWTH US JOB GROWTH

2016f 2016f 2016f

2017f 2017f 2017f

2.9% 2.9% 2.9%

2.5% 2.5% 2.5%

2.0% 2.0% 2.0%

PHOENIX JOB GROWTH PHOENIX JOB GROWTH PHOENIX JOB GROWTH

2018f 2018f 2018f

2019f 2019f 2019f

2020f 2020f 2020f

24% 24% 20% 20% 16% 16% 12% 12% 8% 8% 4% 4% 0% 0% -4% -4%

4% 4% 4% 3% 3% 3% 2% 2% 2% 1% 1% 1% 0% 0% 0% -1% -1% -1%

The information contained in this report was prepared for general information The informationonly contained in this is report was prepared for general only and is not intended legal, tax, accounting or financialor purposes and not intended asinformation legal,purposes tax, only accounting orasas legal, financial advice, The information contained in to thisbuy report wascurrencies preparedor forsecurities general information and is not intended tax,been accounting financial advice, or recommendations or sell or to engagepurposes in any specific transactions. Information has gatheredorfrom third The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or financial advice, or recommendations to buy sell currencies ororsecurities orbytoRED engage in any specific Information has been from third c party sources and has not been independently verified accepted Capital Group. RED transactions. makes no or warranties as tospecifi the accurecommendations toororbuy or sell currencies or securities orrepresentations to engage ingathered any advice, or recommendations to buy sell currencies or securities or to engage in any specific transactions. Information has been gathered from third party sources and has not been independently verified or accepted by RED Capital Group. RED noRED representations or warranties toany the errors accuracy or completeness of the information, assumptions, analyses or conclusions presented in themakes report. cannot be held responsibleasfor party and has of not been independently verified or accepted by gathered RED Capital Group. makes noRED representations or warranties asfor toany the errors accutransactions. Information has been from third party sources and has not racy orsources completeness the information, assumptions, analyses orgathered conclusions presented inparty the report. cannot held responsible or misrepresentations contained in the report or in the information from thirdRED sources. Under nobe circumstances should inforracy or completeness ofcontained the assumptions, conclusions the report. RED cannot held responsible any or misrepresentations report or as in an theanalyses information gatheredofpresented from thirdin sources. no be circumstances should any errors information contained herein beinformation, usedinorthe considered offer or or a solicitation an offer toparty participate inUnder any particular transaction or for strategy. Any been independently verifi ed or accepted by RED Capital Group. RED makes or misrepresentations contained inorthe report orasin an theat information gathered from third sources. no circumstances should any information contained be used considered offer a solicitation an offer toparty participate inUnder any particular transaction orregarding strategy. Anyno reliance upon this herein information is solely and exclusively yourorown risk. Pleaseofconsult your own counsel, accountant or other advisor your mation contained herein be expressed used or considered as anatoffer orown a solicitation ofconsult andue offer to participate in accountant anyand particular transaction orregarding strategy.your Any reliance upon this information is solely and exclusively your risk. Please your own counsel, or other advisor specific situation. Any views herein are subject to change without notice to market conditions other factors. representations oris solely warranties asyourchange toownthe accuracy or completeness of the informareliance situation. upon thisAny information and exclusively at to risk. Please consult own counsel, accountant other advisor regarding your specific views expressed herein are subject without notice due your to market conditions and otherorfactors. specific situation. Any views expressed herein are subject to change without notice due to market conditions and other factors. tion, assumptions, analyses or conclusions presented in the report. RED cannot be held responsible for any errors or misrepresentations contained in the report RED Capital Research | November 2015 Capital Research Novembersources. 2015 or in the information gatheredREDfrom third| party Under no circumstances RED Capital Research | November 2015 should any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon this information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change without notice due to market conditions and other factors. continued on page 11

Advertise in Rental Housing Journal Arizona Circulated to over 10,000 apartment owners, on-site and maintenance personnel monthly.

Call 503-221-1260 for more information 6

Rental Housing Journal Arizona · December 2015

Rental Housing Journal Arizona

How To Dodge A Tax Hit When Selling Rental Property

By making the right move, sellers can sidestep the Capital Gains Tax

he life of a landlord certainly isn’t easy. There are plumbing issues that eat into time and money. There are tenants who fail to pay the rent. There are broken leases and leaky roofs. And the hassles don’t even end when the beleaguered landlord finally decides to sell the property. After the deal closes, the Internal Revenue Service is waiting in the wings to collect a capital gains tax on the profits from the sale. “Depending on your situation that can definitely end up being a significant hit when tax time arrives,” says Dwight Kay, founder and CEO of Kay Properties and Investments (www.kpi1031.com). But Kay says with the right planning those landlords – and anyone who sells commercial property – can sidestep paying the capital gains tax. Here’s how: When they sell their property, they can invest the proceeds in what is referred to as “like-kind” property using Section 1031 of the Internal Revenue Code. Essentially, they are exchanging one piece of commercial property for another, but hopefully one that better meets their needs, Kay says. “A landlord who decides he’s tired of all the work he has to put in on his rental property could use the exchange to get an income-producing property where someone else is dealing with all the problems,” he says.

Publisher Will Johnson – will@propubinc.com Designer/Editor Kristin Flores – kristin@propubinc.com

All types of commercial properties can be considered “like-kind,” including apartment buildings, vacant land, farmland, office buildings and warehouses among other properties.

an opportunity for investors to potentially increase their cash flow on their real estate holdings.

Statutory Trust property could be a property that has a long term lease with Costco or Walgreens or it could be a 200 unit apartment community built in 2014 and located in Denver, Colorado. Investors are able to invest as little as $100,000 into each DST thereby creating a diversified portfolio for there 1031 exchange.”

• Portfolio diversification. Often times, 1031 investors are selling a property that comprises a substantial amount of their net worth. They want to reduce their potential risk and instead of buying one property they decide that investing into a diversified portfolio of Delaware State Trust properties is a better fit for their goals and objectives.

One drawback is that the seller has just 45 days to identify what property they are going to exchange into. It’s not always easy to find 1031 exchanges quickly, but there’s also a Kay says there a several potential benefits for investors. Here are solution to that, Kay says. just a few:

If the seller qualifies as an accredited investor, which is generally defined as an investor with a net worth of greater than $1 million dollars excluding their primary residence, the seller can potentially invest in Delaware Statutory Trust properties. A Delaware Statutory Trust (DST) is a trust that lets investors buy an interest in commercial property, but managing the property is left to professional asset managers. Because Delaware Statutory Trust properties are pre-packaged for 1031 exchange investors, they provide a viable solution for those concerned about meeting that 45-day deadline. Also, despite the name, the property doesn’t have to be in Delaware. Kay, for example, says his Los Angeles and New York City-based company works with clients and properties in all 50 states. Kay goes on to say, “A Delaware

• Eliminating the day-to-day headaches of property management. The Delaware Statutory Trust 1031 property provides a passive ownership structure, allowing the investor to enjoy retirement, grandkids, travel and leisure, as well as to focus on other things that they are more passionate about instead of property management. • Increased cash flow potential. Many investors are receiving a lower amount of cash flow on their current properties than they potentially could be, Kay says. That might be because their properties have under-market rents or multiple vacancies. It could be that they have raw or vacant land that is sitting idle. These Delaware Statutory Trust exchange properties provide

About Dwight Kay

Dwight Kay, founder and CEO of Kay Properties and Investments, LLC (KPI) (http://www. kpi1031.com/www.kpi1031.com), is a Series 7, 22 and 63 licensed, Registered Representative and Real Estate Professional. His firm, Kay Properties and Investments, specializes in Delaware Statutory Trust (DST) brokerage and advisory services. Kay Properties and Investments currently has offices in Los Angeles as well as in New York City and offers securities through Colorado Financial Service Corporation, Member FINRA/SIPC. Kay Properties and Investments, LLC and Colorado Financial Service Corporation are separate entities. OSJ Address: 304 Inverness Way S, Ste 355, Centennial, Colorado.

Advertising Sales Will Johnson – will@propubinc.com Terry Hokenson – terry@propubinc.com Larry Surratt – larry@propubinc.com

Rental Housing Journal Arizona is a monthly publication published by Professional Publishing Inc., publishers of Real Estate Opportunities in Investing & Real Estate Investor Quarterly

www.rentalhousingjournal.com The statements and representations made in advertising and news articles contained in this publication are those of the advertiser and authors and as such do not necessarily reflect the views or opinions of Professional Publishing, Inc. The inclusion of advertising in this publications does not, in any way, comport an endorsement of or support for the products or services offered. To request a reprint or reprint rights contact Professional Publishing Inc. PO Box 6244 Beaverton, OR 97007. (503) 221-1260 - (800) 398-6751 © 2015 All rights reserved.

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Rental Housing Journal Arizona

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Rental Housing Journal Arizona

SK THE SECRET SHOPPER ‘Tis the season to be jol ly.

owever, for many it’s the season of added stress with the holidays barreling down, year end, wondering how you will ever meet next year’s income and expense goals, etc. All of these factors and MORE combine into the perfect storm for those who already struggle with keeping their emotions in check.

While it may seem like the property management industry is about “managing properties,” it’s really about managing and caring for people. Regional and property supervisors are responsible for meeting the needs of their owners, and the staffs and residents of the communities they oversee. On site or resident managers are required to manage and care for their staffs, residents, prospective residents and vendors. This may not be a “news flash” for most of you. However, what may come as a surprise is that not everyone is treating those in their care with the utmost respect and consideration. This is a very “touchy” subject, yet one that still needs to be addressed based upon the following question:

Question I have a pretty good relationship with my property supervisor, but sometimes when a project isn’t done on time or the numbers just aren’t lining up, he yells

and swears at me. I pretend his behavior doesn’t bother me and try to ignore it, but honestly I don’t know how much longer I can put up with this. Not only do these outbursts hurt my feelings, but it’s so unprofessional that I am losing respect for my boss. What should I do?

it actually occurred. You may even try to convince yourself that it wasn’t so bad or that it was a one time, isolated incident that will “never happen again.” However, if someone loses control even once, he or she has the potential of losing control over and over again.

Answer There is no room for verbal abuse in the workplace. It’s a form of harassment, and most companies have policies and procedures in place to protect their employees from this type of treatment. Yet, many people don’t speak up for these reasons: One, they’re afraid they will jeopardize their employment situation and/or experience some sort of retaliation. Secondly, the first time an episode of verbal abuse happens, the initial feeling is shock and perhaps disbelief that

Remember This is a “people” business where every “person” deserves to be treated with respect and consideration; no matter what the circumstances. Property supervisors are going to continue to slash budgets, on site managers will at times overspend and miss deadlines, and certain residents are going to be late with rent payments and damage their apartments. It’s just the nature of the beast. “Keeping your cool” is not an option. It’s a character quality that is essential

Rental Housing Journal Arizona · December 2015

to your success in this business, and life in general. If you find yourself in the type of situation described above, please seek some wise counsel regarding your particular circumstances. If you are a person who has the tendency to take your anger and frustration out on the people you work with, then sign up for an anger management course or ask your co-workers to chip in and buy you a punching bag as a holiday gift!

Note Please don’t take your anger and frustration home with you either. - Your family deserves to be treated with respect and consideration too! If you are interested in leasing training or have a question or concern that you would like to see addressed, please reach out to me via e-mail. Otherwise, please contact Jancyn for your employee evaluation needs: www.jancyn.com Ask The Secret Shopper

Rental Housing Journal Arizona

Arizona Needs to Be Like Utah ...continued from page 1 In that survey, Arizona was ranked 16th, right with Utah. So if site selectors have equal experiences dealing with Arizona and Utah, what is Utah doing to rank higher overall According to the magazine’s “2015 State of the States” report, it could be about taxes and incentives. In that report’s rankings, Utah places 9th in the Tax Foundation’s 2015 State Business Tax Climate Index, while Arizona sits at 23rd. Utah comes in at 18th for the Incentives Transparency Index, which, for this report, measured incentive deals between January 2010 and November 2014. Arizona ranked 31st. In four other measures, Arizona actually did better than or about equal to Utah. Why Utah Excels Obviously, Utah officials know how to close deals, backed by a tax system that, according to the Tax Foundation, is levied “with low rates on broad bases.” The Pollina report credits Utah with having strong state government leadership that “understands the challenge of global competition and has developed and implemented a plan to meet that challenge.” The state has remained in the report’s top spot for three straight years. Forbes was equally impressed with Utah’s economic development efforts when it put it back in its top spot, the fourth time since 2010. “A pro-business regulatory climate, low energy costs and robust employment outlook re-

turns Utah to the No. 1 ranking,” heralds Forbes.

Can Arizona Catch Up? Forbes had hopeful things to say about Arizona, saying the state’s “job and economic growth forecasts over the next five years are among the best in the United States.” State officials are helping that along with more business tax breaks. It’s in the process of dropping its corporate income tax from 6.5 percent to 4.9 percent by 2018. “Once implemented, these reductions will improve Arizona’s score on corporate income tax,” according to the Tax Foundation. Two tax-friendly incentives went into effect last year: • A new tax credit for renewable energy investment if the power will be used for manufacturing • A state sales tax exemption on electricity and natural gas purchased by manufacturers and smelters. Site selectors already think well of Arizona when they start considering places in which to locate or expand. We can hope that, armed with additional business-friendly incentives, the state can close deals that will result in good jobs and a strong economy. Commercial Real Estate Group of Tucson specializes in representing tenants and corporate users across the United States, Latin America, Europe and Asia as an affiliate of ITRA Global. For more information, call 520-299-3400.

4 Reasons Why Women Will Lead The Business World In The 21st Century

hen you let women be women in the business world, they do better. That’s according to a recent report from the Harvard Business Review, which makes the case that traditional thinking – that women should be treated no differently than men in corporate settings – is simply flawed and regressive. A major point the post makes is that only about 20 percent of businesswomen make partner. By expecting from women what you would expect from men, the corporate world is consciously and unconsciously excluding female leadership. That’s a very bad thing, according to many. For example, Kevin O’Leary of “Shark Tank” fame says that of his 27 companies, only the ones with female CEOs make him money. “Women are good for business, so it follows that what’s good for your best women will be good for your bottom line,” says Debora McLaughlin, CEO of The Renegade Leader Coaching and Consulting Group (www.TheRenegadeLeader.com), and author of “Running in High Heels: How to Lead with Influence, Impact & Ingenuity.” “I’ve long advocated this position, and that symbols of female business identity, like high heels, are signs of a businesswoman’s ability to elevate business results, consistently providing a better return for stakeholders.” McLaughlin discusses why women will be essential for leading businesses into a new paradigm this century. • The old way doesn’t work. Since 1955, more than 90 percent of the companies on the Fortune 500 list have gone bankrupt, shrunk in size, become inconsequential, been mopped up by their rivals or closed their doors. Sixty percent of CEOs think their current business model is only sustainable for another three years. Sticking too closely to your old guns, including discouraging a woman’s nature in the corporate world, will likely involve your company in that 90plus percent failure rate. • The business world has already changed. While technology continues to revolutionize how we do business, it has also changed the workforce. Today’s employees are

smarter, more innovative, more creative and full of potential – and it’s not only due to technology. As Generations X and Y emerge as tomorrow’s leaders, Millennials are proving to be very resourceful workers. Old models like “command-and-control” don’t fit with a company’s most precious resource, its people. • Women are more social and excel in collaboration. We shouldn’t generalize to strictly regarding gender norms. However, it’s probably fair to say that women are more nurturing for in-group members. Much of the traditional management method centralized authority; a woman’s leadership is more prone to sharing influence and, perhaps, fostering a creative culture of collaboration. “Of course, this is not a strict gender rule,” McLaughlin says. “But I think it’s the experience of many that women are, in the aggregate, more nurturing. • Momentum will continue to build for women leadership. Momentum tends to build upon itself, and that includes social change. While that change has been slower in the corporate world, we’re already seeing signs and opinions of change, as exemplified by Kevin O’Leary. “More importantly, if the Harvard Business Review’s post is an indicator, women in business will feel more comfortable being themselves in a professional environment,” she says. “Unlocking those invisible shackles from a woman’s high heels will be a game-changer.” About Debora McLaughlin

Debora McLaughlin is the best-selling author of “The Renegade Leader: 9 Success Strategies Driven Leaders Use to Ignite People, Performance and Profits.” Her new book, “Running in High Heels: How to Lead with Influence, Impact & Ingenuity,” is a how-to leadership companion for women in business. She is CEO of The Renegade Leader Coaching and Consulting Group (www.TheRenegadeLeader.com). As a certified executive coach, McLaughlin helps business owners, executives and managers nationwide ignite their inner renegade leader to unleash their full potential, drive their visions and yield positive results, both in business and in life.

Rental Housing Journal Arizona · December 2015

Rental Housing Journal Arizona

3Q15 Market Overview

Phoenix Apartment

MARKET OVERVIEW | 3Q15 | PHOENIX,...continued ARIZONA from page 6

...continued from page 5

SUBMARKET TRENDS (REIS) Eﬀective Rent

Submarket

Physical Vacancy

3Q14 Central Phoenix North

3Q15 $630

Change $644

3Q14

3Q15

Change

2.3%

7.5%

5.4% -210 bps

Central Phoenix South

$728

$741

1.8%

5.3%

4.2% -110 bps

Chandler / Gilbert

$868

$914

5.3%

5.7%

7.4%

Deer Valley

$701

$741

5.7%

4.5%

3.2% -130 bps

East Mesa

$758

$781

3.1%

2.0%

1.4%

Glendale South

$619

$645

4.4%

7.4%

5.6% -180 bps

Goodyear / Avondale

$857

$884

3.1%

2.4%

1.5%

Maryvale

$573

$595

3.8%

6.4%

4.0% -240 bps

$1,017

$1,075

5.6%

5.1%

7.6%

North Scottsdale

170 bps -60 bps -90 bps 250 bps

North Tempe

$825

$889

7.7%

4.2%

5.9%

170 bps

Northeast Phoenix

$740

$772

4.3%

5.6%

5.2%

-40 bps -70 bps

Paradise Valley

$708

$740

4.4%

4.9%

4.2%

Peoria/Sun City/Surprise

$789

$816

3.5%

2.5%

1.5% -100 bps

South Mesa

$658

$681

3.4%

4.9%

4.1%

-80 bps

South Scottsdale

$874

$923

5.7%

8.3%

11.3%

300 bps

South Tempe

$872

$918

5.3%

5.0%

4.2%

-80 bps

Sunnyslope

$659

$676

2.7%

3.2%

2.3%

-90 bps

West Mesa

$625

$648

3.8%

4.1%

3.0% -110 bps

Metro

$759

$795

4.7%

5.0%

4.7%

-30 bps

FOR MORE INFORMATION ABOUT RED’S RESEARCH CAPABILITIES CONTACT: Daniel J. Hogan Director of Research djhogan@redcapitalgroup.com +1.614.857.1416 oﬃce +1.800.837.5100 toll free

below Central Phoenix assets. In outlying areas, first-year yields can range near 8 to 10 percent, with a higher proportion of Class C assets trading in the recent four quarters as buyers’ risk tolerance mounted, a trend likely to continue through the year.

2015 Annual Apartment Forecast Employment: After lifting headcounts by 49,300 in 2014, employers will increase the number of new hires by 30,000 or 1.6 percent this year. The largest gains are expected in the professional and business services, and education and health services. Construction: Apartment developers will provide 7,200 new units to the Phoenix metro this year, adding 2.2 percent to the metro’s inventory. This is a new peak in completions in more than a decade and nearly double the 4,300 rentals delivered in 2014. Vacancy: A strong job outlook will drive tenant demand, tightening vacancy 60 basis points over the year to 5.4 percent even as new inventory flows into the metro. This rate is 80 basis points above the pre-recession low. In 2014, vacancy fell 110 basis points. Rents: Average effective rent will rise 6.9 percent to $882 per month in 2015, as concessions continue to diminish based on mounting demand. This surge overshadows the 5.8 percent advance last year. Published Courtesy of Marcus & Millichap

THE FACE OF LENDING RED Capital Group, LLC  RED Mortgage Capital, LLC  RED Capital Markets, LLC (Member FINRA/SIPC)  RED Capital Partners, LLC 10

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Rental Housing Journal Arizona · December 2015

Rental Housing Journal Arizona

Rental Housing Journal Arizona 路 December 2015