RESEARCH

KW PHOENIX APARTMENT GROUP

Keller Williams Arizona Realty

15333 N Pima Rd., #130

Scottsdale, AZ 85260

T 480.767.3000

F 480.629.5105


PHOENIX APARTMENT OVERVIEW- Provided by CoStar


Elevated demand for apartments, fueled by robust employment growth and limited residential development, has mitigated supply-driven pressure on vacancies since the construction boom started in 2013. 

Despite some of the strongest household formation in the country, single-family development has been slow. While housing starts have edged up since coming to a near standstill during the recession, they are still nearly half of their pre-recession level. Limited supply and escalating home values are forcing potential home-buyers into the renter pool. As a result, net absorption has kept pace with heightened levels of new apartment supply, compressing Phoenix's vacancy rate below 7%, which is low for this market.

 

Tight apartment fundamentals have contributed to ample rent growth that has consistently ranked among the best in the nation during the past two years. Thanks in part to healthy job gains and comparatively affordable rent, the market has achieved rent gains while absorbing an inundation of new supply. Investors are increasingly bullish on Phoenix. The market has achieved a new record for investment over the past two years. Pricing has surged over the past several quarters, contributing to the compression of cap rates below 6% for the first time this decade. Despite the compression, Phoenix still offers a 150–200-basis-point spread over California rates, which continues to drive yield motivated investors to the market.


Vacancy

Strong employment growth and household formation
have stimulated apartment demand in Phoenix. Metro
Phoenix ranked second in the nation for net migration in
2018, with an average of 200 people moving to metro
Phoenix daily. The influx of residents is fueling demand
for housing, yet at the same time, single-family starts
remain far below historic levels of building.

Strong employment growth and household formation have stimulated apartment demand in Phoenix. Metro Phoenix ranked second in the nation for net migration in 2018, with an average of 200 people moving to metro Phoenix daily. The influx of residents is fueling demand for housing, yet at the same time, single-family starts remain far below historic levels of building.


Rent


Phoenix remains the top market in the country for multifamily rent growth, bolstered by healthy employment growth, household formation, and moderate new supply. Despite robust rent gains that are more than double the U.S. average, Phoenix maintains its place as an affordable market. Average monthly rent of $1,160/month is roughly 20% below the national average. 


Annual rent growth has started to decelerate from a high of 8.2% in 2019 Q1 to a still healthy 6.4%. Some sub-markets have achieved stronger rent growth than others. Robust household formation and relatively limited supply early in the expansion generated substantial rent growth in the East Valley and West Valley sub-markets.


Meanwhile, rent growth in the most aggressively built sub-markets is trailing areas with more sustainable development. Yet, even the lowest-performing markets are still recording more than 5% rent growth, which is far outpacing the U.S. average. Despite strong demand in Downtown Phoenix and Tempe, elevated deliveries in recent years have stunted more prominent rent growth.


Construction


Construction starts edged up in 2019, as developers attempted to meet renter demand. Pent up demand from years of limited residential building in the depths of the recession and new demand fueled by healthy employment growth are motivating builders.


Approximately 9,000 units were added to inventory in 2018, the highest level of annual completions on record. Deliveries moderated in 2019, to less than 7,000 rentals but the pace of completions will accelerate in 2020. About 15,000 units are currently underway, with about 9,000 units expected to deliver this year.


Sales


Investors remain bullish on Phoenix's apartment market. Phoenix's favorable demographics and its position as one of the top markets in the country for multifamily rent growth are supporting steady cash streams, which is gaining investor attention. Additionally, rent control measures in other areas of the country should shift some private buyers to Phoenix in the near term. 


The market reached another peak investment year in 2019 before year end, following a record-breaking 2018. In 2019, sales volume surged to $7.9 billion, up from the $6.2 billion recorded one year earlier. Out-of-state investors are driving activity, especially California buyers. Average cap rates in Phoenix are roughly about 150 basis points higher than those in Southern California, which is attracting yield-driven investors. Additionally, some buyers have returned to Phoenix after incurring substantial losses during the last downturn, convinced that the metro’s positive performance is more sustainable this time around. 


Increased competition for assets has put upward pressure on pricing. The average sales price has risen to $170,000/unit, up 54.9% from the pre-recession peak. Over the past decade, the per-unit price has grown at an average rate of 8.6%. The pace of price appreciation is expected to soften over the next few years, coinciding with the expected U.S. economic slowdown.




NATIONAL APARTMENT REPORTS- Provided by Yardi Matrix

> 2020: February March


KW Phoenix Apartment Group

15333 N Pima Rd., Suite 130

Scottsdale, AZ 85260

T 623.466.5849

F 480.629.5105

germain@kwcommercial.com

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