Multifamily Remains Popular in Shifting Phoenix Market

by Jeff Shaw

By Kimberly A. Rollins, Senior Vice President, Rollins & Randall Multi-Family Group, Commercial Properties Inc.

The big question on everyone’s mind is where Phoenix’s multifamily market is going. After several years of pandemic-caused uncertainty, the implications are still transforming the market. Whether it is workforce mobility, supply chain issues, or labor shortages, uncertainty and inflation have affected all areas of real estate — no place more so than here in the Phoenix Metro Area. 

The perfect storm of historically low interest rates, job opportunities, limited new development and a low cost of living have given rise to the housing shortage that has played out in the Valley over the past several years.  We saw multifamily effective rent increase 22.7 percent year over year in the third quarter of 2021, and an average market sale price per unit of $297,697, with a 3.9 percent year-to-date cap rate, according to CoStar. 

Over the past 10 years, vacancy rates have dropped every year. They fell from 8.3 percent in 2012 to a low of 5.8 percent in 2021. Conversely, year to date we are seeing a vacancy increase for the first time during that timeframe, to 7.7 percent. Last year also saw the highest level of absorption over the past 10 years at 11,438 units, per CoStar (see chart). The most active 12-month delivery submarket is downtown Phoenix, with 3,522 units delivered and another 4,612 under construction. 

Downtown Phoenix also has the highest current vacancy rate at 11 percent. The North Phoenix, South Phoenix and Southeast Valley tied with the lowest vacancy at 5.6 percent. However, market influences are changing. Interest rates rose from 2.88 percent to 5.51 percent within the past six months. Single-family resale inventory is up 237.3 percent year over year, according to June 2022 ARMLS statistics, while 29,107 multifamily units are under construction and scheduled to be delivered over the next couple years. 

There is some upward pressure on multifamily cap rates due to rising interest rates, as well as the potential for vacancy rates to continue increasing with new deliveries. However, multifamily investment can still offer a hedge against inflation due to short-duration leases versus other real estate investments that see longer lease timeframes that may not keep up with inflation. The recent expansion in inventory of (resale) single-family residential is already leading to an increase in days on the market. However, the average sale price in June, per ARMLS Statistics, was $590,800. This is an increase of 16.3 percent year over year. 

The Phoenix Metro area benefits from the continued positive net migration of job opportunities created through new developments like the Taiwan Semi-Conductor Facility in North Phoenix. The continued influx of population will ensure housing demand remains high for the next several years. If interest rates stay steady or increase — thereby challenging home purchase affordability — rental demand will continue. It just may not continue at the velocity from the past couple years.

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