Demand, Product Coming to Phoenix’s Multifamily Market
With record-low cap rates dipping as far as 2.9 percent, the nation’s top multifamily markets have become expensive. In response, investors have turned to secondary markets like Phoenix, where upside potential is still strong, pricing is manageable and cap rates are hovering in the high 4 percent to mid-5 percent range. Although multifamily sales have maintained their accelerated pace nationwide, that pace is being driven by secondary markets — particularly in the West.
Metro Phoenix captured more than $5.2 billion of this activity, up significantly from its previous peak of $4.6 billion in total multifamily sales in 2006. As of year-end 2016, the average multifamily price per unit in Phoenix was $110,000, compared to a national average of $145,000 for properties valued at more than $2.5 million.
In the eyes of investors, Phoenix offers a stable inventory of existing Class A and B product, and a wave of new Class A units that have taken luxury in the market to a new level. This high-end product provides a key benefit for investors: it attracts residents who are willing and able to pay premium rents for a better lifestyle.
The Valley is in a good position to support luxury product, with a robust business climate where new companies continue to relocate and expand, supporting the growth of about 50,000 new jobs in the past 12 months. Rents have grown alongside jobs, improving 6.4 percent year-over-year to an average of $927 per unit — all as national multifamily rent growth dipped below 4 percent for the first time since 2014.
Among metro Phoenix’s submarkets, Tempe has emerged as the most popular up-and-coming live-work-play environment. It delivers an urban core location surrounded by thousands of jobs, a growing economy and strong resident demographics. It also has a median age of 29, with 41.4 percent of residents holding a bachelor’s degree or higher. Class A multifamily rents in Tempe also rival the market’s most sought-after cities. At an average of $1,211 per month, Tempe ranks second only to Scottsdale Airpark (average $1,298 per month) and outperforms South Scottsdale (average $1,208 per month) and Downtown Phoenix (average $1,183 per month).
With upside potential still strong, multifamily listings in Tempe are not commonplace, but they do occur. Such is the case with JLL’s new Aura on Broadway listing, which is located on Broadway Road, less than one mile from the main campus of Arizona State University and the downtown Tempe employment corridor. The property secures an average rent of $1,438 per month, thanks to amenities such as granite countertops, Whirlpool stainless appliances, detached garages, an entertainment lounge, resort-style swimming pool, outdoor kitchen, game courts, pet park, athletic center and bike repair shop.
Tempe is also busy with new product construction, including 423 units at McClintock Station on Apache Boulevard and 263 units at SALT on the Tempe Town Lake next to State Farm’s new Marina Heights campus. This is part of 8,200 total units under construction in the Valley, with new construction market leaders being Chandler/Gilbert, Scottsdale and Central Phoenix.
Looking forward, strong absorption will mitigate any vacancy spikes that might arise from Phoenix’s current active development pipeline. In the process, the Valley’s most popular multifamily submarkets, including Tempe and Scottsdale, are expected to remain hotbeds of activity, driven by positive demographics and economic trends. This is just another piece of good news for a metro market that is expected to continue to outperform the nation as investors increasingly take notice of Phoenix’s robust growth.
— By John Cunningham, Executive Vice President, JLL, and Charles Steele, Senior Vice President, JLL. This article first appeared in the February 2017 issue of Western Real Estate Business magazine.