Renter, Investor Demand on the Rise in Phoenix’s Multifamily Market
The Greater Phoenix multifamily market continues to thrive in a high-demand environment, driven by strong tenant volume and investor interest. As the local economy expands, employers are adding workers at a steady pace while demand for housing is on the rise. Apartments remain the preferred choice for many, pushing multifamily vacancy rates low even as new units are added to inventory. We fully anticipate these conditions to continue in the year ahead.
Multifamily vacancy in the Greater Phoenix market ended the second quarter of 2016 at 5.9 percent, 20 basis points lower than one year earlier. Vacancy typically ticks higher in the second quarter, as some part-time residents escape the summer heat wave. This trend occurred again this year. Despite the recent seasonal rise, vacancy has been below 6 percent for the past four quarters, and the rate will undoubtedly tick lower in the second half of this year.
The low-vacancy conditions are fueling robust rent growth. Asking rents have spiked by more than 8 percent in the past year, while the pace of gains is accelerating. Asking rents rose more than 5 percent in the first half of 2016, with additional increases anticipated in the months ahead. More than one-third of the submarkets in Greater Phoenix have asking rents above $1,000 per month.
Developers are ramping up activity to meet renter demand. About 3,250 units have come online through the first half of this year, following the delivery of nearly 7,400 apartments in 2015. New construction will continue at a healthy pace for at least a few more years. Projects totaling about 9,700 units are under construction, and multifamily permitting thus far in 2016 is up 30 percent from the same period one year ago.
Strong property performance has caught the attention of the investment market. Sales activity has been on the rise for the past few years. Transactions also spiked in the second quarter of 2016. More properties changed hands in the second quarter of 2016 than in any quarter in nearly a decade. This is great news, considering the transaction pipeline for the second half of the year looks healthy as well.
With investor demand high and property cash flows strengthening, sales prices are pushing even higher. The median price in the first half of 2016 was north of $106,000 per unit, 36 percent higher than the 2015 median price.
The current financing environment is supporting both the number of properties changing hands and the rise in prices. Borrowing costs are low and lenders are more aggressive with loan-to-value ratios than they were in earlier years of the recovery.
The outlook for the Greater Phoenix multifamily market remains quite favorable. Vacancy is low and rents are rising at an accelerated pace. Population and employment growth are fueling renter demand and developers are in the process of meeting that demand with high-end, amenity-rich units located in submarkets where demand is strong. These conditions have been in place for some time, and there are no signs of any course changes on the horizon.
— By Bill Hahn, Executive Vice President, Colliers International. This article first appeared in the September 2016 issue of Western Real Estate Business.