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The multifamily market in the Phoenix metropolitan area remains, as it was in 2012, the most popular property sector for investment and new construction. Post-recession job creation, coupled with echo-boomers leaving the nest, has created a leveraged demand for multifamily product.
Years of near-zero construction, followed by a rapid increase in demand, has created a landlord’s market throughout most of the valley. Vacancy across the Phoenix metro area is now less than 7 percent. It is expected to fall to less than 6 percent by the end of the year. Rental rates are up 3 percent to 5 percent valley-wide, with some submarkets fairing much better than others. Scottsdale, North Tempe and South Phoenix are some of the areas where rents are up significantly and vacancies are down. Concessions are waning in most regions, though a few remain in parts of the West Valley and Central Black Canyon.
This surge in demand is spurring new apartment development catering to Generation Y (echo-boomer) tenants. Many in this demographic subset are choosing apartment living. They are doing so for two reasons: either to avoid the hurdles of qualifying for a home mortgage or to enjoy higher-end finishes and amenities that are found in these newer apartments but not in starter homes. Location is a prime feature of these projects, which are primarily east of Interstate 17 in premium infill locations near employment centers, retail and transportation. Social spaces incorporated within the community or nearby (coffee shops, etc.) are also very important to these renters, which has driven demand in this development cycle. By building to meet the preferences of these young and mobile tenants, developers and investors are rewarded with high dollar rents from $1.50 to $2 per square foot.
There are a little more than 5,000 units projected for delivery in 2013, with permit forecasts of more than 7,000 units for 2014. An estimated 26,000 new units are expected to be delivered between 2013 and 2016.
On the acquisition side, lower vacancies and higher rents have shaped an impression of apartments as a safe haven for capital where yields can be increased through operational improvements. Experienced sponsors have access to historically low-rate financing in the range of 3.5 percent to 4.5 percent. This has spurred an increase in the number of sales transactions each year for the past two years. Thus far, 2013 can be characterized by a slowing in the number of transactions but an increase in the size and price paid per unit. This is indicative of fewer distressed properties in the market, as well as the sale of more Class A communities. Capitalization rates have been compressed to 2007 levels, though recent increases in interest rates may signal higher capitalization rates in the near future. This could create a drag on property values even as operational results continue to improve.
Multifamily projects will continue to outperform other asset classes in Phoenix in the near term. Medium-term risks for multifamily investors lie in rising interest rates and cyclical oversupply of rental units predicted for some time in 2016.
— Jeff Gorden, vice president, Eagle Commercial Realty Services