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After several years with virtually no new construction of multifamily homes, the Metro Phoenix market looks to rebound with a pipeline of projects that could result in 5,000 to 7,000 new units built per year in 2013, 2014 and 2015. That returns our market to construction levels last seen in 2007. In order to see this volume of construction, developers will need to be successful in raising the required equity, which has been a challenge.
At the end of 2012, the Valley had 17 projects (of 50 units or greater) under construction, totaling a little more than 4,200 units. Building on that, we expect to see 15 to 20 projects per year through 2015. This is just a fraction of the more than 20,000 units filling the development pipeline. The demand for all these units, however, will hinge on Phoenix’s population and job growth. It will also be influenced by the national and global economies.
Developers are capitalizing on the recent purchases of properties in prime, upscale locations that were not previously considered for strictly rental housing. Alliance Residential, P.B. Bell and JLB have all either begun construction or have plans in the works for rental developments in premium Phoenix locations. Popular locales include 26th Street and Camelback Road, Goldwater Boulevard and Camelback Road, Lincoln and Scottsdale Roads, 44th Street and Camelback Road, and the area surrounding Kierland Commons and Scottsdale Quarter. With these prime locations comes the ability to deliver top-of-the-line units with high-end finishes, amenities and price tags. These new premium properties will charge rents in the $1.75 to $2 per square foot range, which is a 40 percent increase in rental rates for top-tier properties. While this product type is new to Metro Phoenix, other markets, including San Diego, Denver and Houston, have successfully developed and leased rental properties in premium locations. Phoenix developers are hoping to capture a new demographic that includes tenants who could easily afford to purchase but choose to rent.
While the premium infill locations are going to push the rental rate ceiling, units in other suburban markets are just now reaching rental rates that would justify new construction. The Southeast Valley, specifically Chandler, as well as other locations in Phoenix and Scottsdale near employment corridors, will be the first to see the new development of garden-style units in 2013. The influx of new properties coming online should not impact rental rates as we expect them to continue a slow but steady rise.
The expanding student population among local universities means several student housing projects will come online during fall 2013. Tempe expects to have more than 500 new rental units open. The city should also see the return of the Manzanita student housing project on the Arizona State University (ASU) campus by August. The Downtown ASU campus continues to draw more students, who will definitely welcome the 326 new rental units opening just east of their urban campus.
Investors remain excited about multifamily properties in the Phoenix market. Over the past two years we have seen a significant increase in the number of properties sold. The market continues to move away from the REO sales that dominated in 2010 and 2011 and toward more traditional property sales. Last year less than 20 percent of the sales were REO properties. The supply of available properties continues to lag in comparison to the pool of buyers. We have seen prices move upward, albeit slowly. Sellers will continue to gradually push prices up in 2013.
Private and institutional buyers continue to benefit from attractive, readily available financing. The outlook for this year is a continued increase in sales activity with stable cap rates. Of course, all this good news continues to hinge on the forward progress of the economy.
— David Fogler, executive vice president of the multifamily group with Cassidy Turley Arizona