Phoenix Market Demand Sustains Multifamily Devleopment
Multifamily rental demand in Metro Phoenix has been supported by higher education, while job growth has bolstered construction in the core and neighboring suburbs. Arizona State University has transformed the multifamily properties surrounding its large campuses in Tempe, Downtown Phoenix, Glendale and Mesa. The multifamily rental assets in the West Valley submarket have also been rejuvenated by Grand Canyon University. Thanks to these institutions and several others in the Greater Phoenix area, the growing skilled labor force has benefitted from job growth by supporting several Fortune 500 companies that have continued to increase their presence throughout the region. The recent expansions allow more graduates to remain in the Phoenix area and attract many new professionals to the market, ultimately enhancing rental demand in Phoenix and its neighboring suburbs. The rising number of residences has compressed vacancy rates in the metro as thousands of units are absorbed annually. This market demand will support the continued rise in rental prices and spur apartment development in the upcoming years.
Apartment development has continued its strong pace in Phoenix. The metro is expanding its rental supply with about 8,250 units finalizing in 2019. Of this year’s deposit, roughly 2,600 units will be added to the City of Phoenix. The West Valley area is also scheduled to receive a sizeable delivery this year with more than 1,400 units coming online. East Valley submarkets have been heavily targeted by builders, with 2,600 apartments set to deliver between Chandler, Mesa and Tempe by the end of the year.
A few investment trends have recently emerged in the Metro Phoenix area. The most noteworthy is that Phoenix multifamily properties have been targeted by cash-flow-focused investors. This has increased deal flow over the past year (ending in June) by 27 percent. This is due largely to heavy trading activity during the first half of the year. Another trend worth noting is the increase in the average sales price per unit, which has appreciated by 165 percent since the trough of the recession, and 90 percent since 2013. The increase has allowed both long- and short-term owners to capitalize on the equity gained.
The changing market average cap rate has raised interest as well. The market average cap rate has compressed 20 basis points to 5.6 percent compared with the second quarter of last year as bidding becomes more competitive among out-of-state buyers. On average, first-year returns in Metro Phoenix are 150 basis points above what can be achieved on comparable assets in coastal Southern California metros. Many private investors in these markets are drawn to the Phoenix area for opportunities providing stronger yields.
— By Ryan Sarbinoff, vice president and regional manager, Marcus & Millichap. This article first appeared in the August 2019 issue of Western Real Estate Business magazine.