— By Ryan Sarbinoff, first vice president and regional manager, Marcus & Millichap —
Phoenix ranks third among the major markets in terms of both total net in-migration and job creation since the end of 2019. The region has also posted one of the largest jumps in median household income. Combined, these factors underpin heightened demand for housing and support elevated multifamily development.
While total deliveries will rise for the fourth consecutive year in 2024 to a record high of 22,000 rentals, apartment absorption has notably kept pace through mid-year. As such, metro-wide vacancy is on track to dip to 7 percent by December. This would mark both a 30-basis-point decline from the 2023 peak, as well as an 18-month low. The improving alignment of supply and demand will encourage a return to rent growth, albeit slight. The average effective rent will end 2024 at $1,585 per month, up from the year before but down 5.3 percent from the peak set in 2021.
Apartment completions over the past year (ending in June) were most prevalent in the Avondale-Goodyear-West Glendale submarket, where a collective 5,200 units opened. This represented a 23.8 percent boost to existing stock. Yet, the substantial wave of openings has not impaired local operations. Vacancy only lifted 40 basis points year over year. Local vacancy also fell in Gilbert, Chandler and Deer Valley — areas where stock growth exceeded 3 percent over the past 12 months. These trends indicate that recent supply additions have been largely well aligned with demand. This dynamic is also aiding the market’s Class A apartment sector.
While the Class A, mid-year vacancy reading of 7 percent was 130 basis points above the average from 2014 to 2019, it also marked a 10-basis-point dip from the same point in 2023. The June metric was actually below the Class C mark despite competition from prodigious new supply interacting with existing high-end rentals. Underscoring this point, top-tier apartment vacancy trailed the metro-wide level in the Avondale-Goodyear-West Glendale area, as well as in Gilbert and Chandler. New supply pressure is nevertheless prompting wider concession use, which is weighing on rent growth. The mean Class A monthly payment was down about 1.5 percent year over year at the end of the second quarter. That said, operational challenges are more apparent among budget-conscious rental properties.
While all local apartment tiers have recorded elevated vacancy over the past three years, the Class C measure has climbed the most. After bottoming out at 1.6 percent at the end of 2021, lower-tier vacancy has risen 220 to 240 basis points more than the Class A or B rates through June of this year. Yet, the mean Class C rent as of mid-2024 was 11 percent above the 2021 reading, compared with declines in the other segments. That gap has started to narrow over the past four quarters, though, with nearly half of all Class C rentals in June offering some form of concession. These metrics indicate an imbalance between supply and demand among the most budget-conscious renters. A greater recovery in the Phoenix rental market will depend, in part, on improvements in this sector.
While the Phoenix multifamily sector is contending with elevated vacancy and hindered rent growth, the number of trades completed in the second quarter was the highest three-month total since the final period of 2022. Cap rates have increased (on average) following that year, up to an annual mean of 5.3 percent as of mid-2024. This indicates that more buyers and sellers are coming to agreement. The recent 50-basis-point cut to the federal funds rate in September, with further reductions on the horizon, could aid this dynamic.
Buyers have been active across the market over the past four quarters that ended in June. This includes the central axis of the metro that stretches from Tempe, west to Downtown Phoenix and extending north. While these areas have seen less pronounced population growth than some other parts of the market, development has been similarly lacking. Investors may be focused on central areas, where there are opportunities to acquire either pre-1970s built assets for less than $200,000 per unit or stabilized post-2010 builds. This includes investors outside of Arizona, with California as the most common state of origin. Lower entry costs and higher yields than what’s offered by major metros in the Golden State will continue to draw attention to Phoenix.
This article was originally published in the October 2024 issue of Western Real Estate Business.