Keller Williams Arizona Realty

15333 N Pima Rd., #130

Scottsdale, AZ 85260

T 480.767.3000

F 480.629.5105


Before the corona virus outbreak, Phoenix multifamily metrics were solid and supported by some of the strongest employment and household growth in the country. Relatively low levels of single-family home building and healthy demand had kept vacancies tight. While the multifamily sector is not immune to the impact of the pandemic, it is believed to fare better than the retail and hospitality sectors. Policies adopted to stop the spread of the virus have resulted in a record level of jobless claims, and the drag on the economy is expected to continue over the next several quarters, which will soften demand for apartments. Despite a strong first quarter, leasing volume has substantially slowed since mid-March. At the same time, construction activity has continued, nearly undisturbed. About 16,000 apartment units are underway and slated to deliver over the next several quarters.

While it is unknown how long the impact of the pandemic will last, it will be temporary, and the demand drivers that were supporting the market before the virus will eventually return. Phoenix is the top market in the nation for net migration, and many people who are living in dense and expensive cities right now may consider a move to the Valley of the Sun in search of job prospects and more a more affordable cost of living. Despite robust population growth, single-family development has not kept pace. Limited single-family supply has contributed to some of the most substantial home price appreciation in the country, which has forced some potential home buyers into the renter pool.


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.
The Phoenix multifamily market fared pretty well in the second quarter, considering the economic disruption caused by the corona virus. But net absorption was still a fraction of the level of activity that took place one year earlier. The market's performance is buoyed by significant federal and state stimulus that have helped numerous people facing financial hardships pay the rent.

Demand was positive in the first half of the year, but new supply some upward pressure on vacancies. Apartment leasing has slowed since March, when the statewide stay at home order went into effect. Despite the gradual reopening of the economy in mid-May, many renters are still facing layoffs and furloughs, especially as COVID cases rise again in Arizona. Financial difficulties will alter living arrangements for many renters. Some people may shift from expensive to more affordable sub markets, while others may be pressured to move down the quality ladder, double-up with a roommate, or move back to their family home. Alternatively, historically low mortgage rates may entice some renters to explore home ownership in the suburbs. Either way, demand for apartments will soften over the next few quarters.

Fortunately, vacancies were near historic lows before the pandemic. Conservative levels of single-family construction, job creation, and population growth put sustained downward pressure on vacancies since 2010. Multifamily developers have worked to meet demand in one of the fastest-growing metros in the nation. Last year, an average of 212 people moved to Phoenix daily, according to the U.S. census. That growth helped the market absorb a wave of new supply. The market-wide vacancy was 6.7% in 20Q1, but the rate has risen to 7.0%. According to the Base Case Scenario, vacancies will rise over the next several quarters, as new supply outpaces demand. Most of the increase will be in 4 & 5 Star apartments.


Phoenix was the top market for multifamily rent growth for a second consecutive year in 2019. Steady rent gains were supported by healthy employment growth, household formation, and moderate new residential supply. Despite robust rent gains that were more than double the U.S. average, Phoenix maintains its place as an affordable market. Average monthly rent of $1,180/month is roughly 20% below the national average. 

However, the pandemic has created significant financial hardships for many of Phoenix's renters. and landlords reacted quickly. As can be seen in the daily asking rent series, rents fell nearly 2% from the March peak to mid April. The rent reductions were more significant for 4 & 5 Star communities. The rent reduction took place during what is typically a peak leasing season in Phoenix. Rents have started to rise again, though not yet returning to pre-virus levels.


Developers remain active in Phoenix, following two years of heightened new supply. Construction has continued nearly uninterrupted by the pandemic since building trades were designated as an essential service. Last year, about 8,800 units poured onto the market, and the majority was completed in the fourth quarter. An additional 16,000 units are under construction across the metro, and nearly all of the buildings are 4 & 5 Star.


In past years, builders were focused on delivering top-tier product in affluent suburbs. More recently, development has spread into other previously overlooked parts of the Valley. Downtown Phoenix, by far, has led all other areas in the metro for new development, and approximately 4,000 units are under construction. The revitalization of Downtown Phoenix has made the sub market a top destination for millennials and multifamily development, which wasn't the case five years ago. Apartment inventory in the Downtown Phoenix Sub market, which includes Midtown and Uptown, expanded by roughly 16% since 2016, the most significant increase of any sub market in metro Phoenix.


Robust rent gains, a moderation in supply, and substantial population growth have attracted buyers to Phoenix and bolstered competition for multifamily assets. Significant interest in the Phoenix multifamily market has resulted in two consecutive years of record-high investment volume. Well-priced assets are trading at a record pace of fewer than four months, on average. Total sales surpassed $7.9 billion last year, far above the pre-recession high of $4 billion that transacted in 2006. 

While momentum carried into the first few months of 2020, sales volume substantially slowed since March due to a combination of factors, including heightened uncertainty among both investors and lenders, difficulty underwriting during this period of market volatility, and a gap between buyer and seller expectations.


> 2020: February March June

KW Phoenix Apartment Group

15333 N Pima Rd., Suite 130

Scottsdale, AZ 85260

T 623.466.5849

F 480.629.5105

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