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

Phoenix multifamily fundamentals have improved since
the onset of the pandemic, and vacancies have
compressed to a historic low. Before the coronavirus,
fundamentals were solid and supported by some of the
country's strongest employment and household growth
and low levels of single-family inventory. While the
multifamily sector has not been immune to the impact of
the pandemic, it has fared better than other commercial
property types. Much of that positive performance was
bolstered by federal and state aid that has helped people
pay the rent and eviction moratoriums that have kept
renters in their apartments.
Net absorption accelerated in the second half of 2020,
despite a slow start to the year, and outpaced new
supply. Vacancies compressed to a record low in midtier
apartments. Despite healthy conditions, landlords will
need to brace for a wave of deliveries. The construction
pipeline is robust and limited to top-tier rentals, whereas
demand for affordable units has surged. The mismatch in
supply and demand will likely push up 4 & 5 Star
vacancies in the near-term.
Phoenix's demand drivers are even stronger than before.
Phoenix multifamily fundamentals have improved since
the onset of the pandemic, and vacancies have
compressed to a historic low. Before the coronavirus,
fundamentals were solid and supported by some of the
country's strongest employment and household growth
and low levels of single-family inventory. While the
multifamily sector has not been immune to the impact of
the pandemic, it has fared better than other commercial
property types. Much of that positive performance was
bolstered by federal and state aid that has helped people
pay the rent and eviction moratoriums that have kept
renters in their apartments.

Phoenix multifamily fundamentals have improved since the onset of the pandemic, and vacancies have compressed to a historic low. Before the corona virus, fundamentals were solid and supported by some of the country's strongest employment and household growth and low levels of single-family inventory. While the multifamily sector has not been immune to the impact of the pandemic, it has fared better than other commercial property types. Much of that positive performance was bolstered by federal and state aid that has helped people pay the rent and eviction moratoriums that have kept renters in their apartments.

Net absorption accelerated in the second half of 2020, despite a slow start to the year, and outpaced new supply. Vacancies compressed to a record low in mid-tier apartments. Despite healthy conditions, landlords will need to brace for a wave of deliveries. The construction pipeline is robust and limited to top-tier rentals, whereas demand for affordable units has surged. The mismatch in supply and demand will likely push up 4 & 5 Star vacancies in the near-term.

Phoenix's demand drivers are even stronger than before.

Phoenix multifamily fundamentals have improved since
the onset of the pandemic, and vacancies have
compressed to a historic low. Before the coronavirus,
fundamentals were solid and supported by some of the
country's strongest employment and household growth
and low levels of single-family inventory. While the
multifamily sector has not been immune to the impact of
the pandemic, it has fared better than other commercial
property types. Much of that positive performance was
bolstered by federal and state aid that has helped people
pay the rent and eviction moratoriums that have kept
renters in their apartments.

Phoenix multifamily fundamentals have improved since
the onset of the pandemic, and vacancies have
compressed to a historic low. Before the coronavirus,
fundamentals were solid and supported by some of the
country's strongest employment and household growth
and low levels of single-family inventory. While the
multifamily sector has not been immune to the impact of
the pandemic, it has fared better than other commercial
property types. Much of that positive performance was
bolstered by federal and state aid that has helped people
pay the rent and eviction moratoriums that have kept
renters in their apartments.
Net absorption accelerated in the second half of 2020,
despite a slow start to the year, and outpaced new
supply. Vacancies compressed to a record low in midtier
apartments. Despite healthy conditions, landlords will
need to brace for a wave of deliveries. The construction
pipeline is robust and limited to top-tier rentals, whereas
demand for affordable units has surged. The mismatch in
supply and demand will likely push up 4 & 5 Star
vacancies in the near-term.
Phoenix's demand drivers are even stronger than before.

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.
The Phoenix multifamily market has fared well throughout the pandemic and vacancies have compressed thanks to demand for affordable living. While leasing initially slowed during the 2020 spring leasing season demand strengthened throughout the rest of the year and that momentum has carried into 2021. The market's impressive performance was buoyed by significant federal and state stimulus that helped people pay the rent and an eviction moratorium that kept people in their homes.


Vacancies have remained firm in stabilized apartments, but the rate has risen in newly delivered properties. Construction has been limited to luxury rentals, and new supply is concentrated in urban areas of Phoenix, including Downtown Phoenix, Scottsdale, and Tempe. But since the start of the pandemic, renters' preferences have shifted from top-tier apartments in city centers to affordable units in the suburbs. Availability tightened in the suburbs and have remained stubbornly high in urban neighborhoods. Many people couldn't justify paying a $200-$500/month premium to live in luxury apartments near employment hubs when companies had extended work-from-home policies and apartments temporarily restricted access to amenities. As a result, areas in the West and East Valleys are outperforming sub markets such as Downtown Phoenix, Camelback, and Old Town Scottsdale.


The overall outlook is generally favorable. There is still some concern about oversupply in select sub markets over the next few quarters. Over the past five years, a healthy balance between supply and demand has kept vacancies in the mid-6% to low-7% range. The low inventory of single-family supply and rapid home price appreciation has forced some would-be homeowners into the renter pool and is keeping apartment vacancies low.


Rent


Phoenix remains one of the top markets in the country for rent growth. Despite rent gains that have consistently outstripped the U.S. average over the past five years, Phoenix has maintained its place as an affordable market in the Western region. Rents are below the national average and account for about 20% of the metro's median household income. That rent-to-income ratio is much more favorable than Los Angeles, San Francisco, San Jose, and Seattle—all of which are markets that recorded negative year-over-year rent growth in 2020.


Rents in Phoenix recovered from the COVID-19 dip faster than most large markets. A key reason for the impressive local performance was that stimulus payments went a longer way in Phoenix than it did in pricier metros. Congress passed a second relief bill in December that provides an extra $300/week in addition to state benefits, which will continue to support rent payments in Phoenix in the near term.

Not all sub markets recovered equally. Rents in the suburbs returned to January 2020 levels six months before urban neighborhoods reached the same milestone. Deer Valley and East Valley sub markets have outperformed in terms of rent growth. Rent gains have also been impressive In the affordable West Valley, where residential development has not kept pace with household growth.

Rent growth had slowed before the pandemic; rent gains decelerated from a high of 8.2% in 19Q1 to about 4.2% in 20Q1. But the pace of growth has accelerated. Mid and lower-tier apartment communities have achieved the strongest gains in recent years due to tight availability and limited new supply. Rent growth among 3 Star properties have increased 8.8% over the past 12 months, compared to 7.7% in 4 & 5 Star communities.


Construction


Completions exceeded 8,000 units for a third consecutive year in 2020, and the supply wave isn't over. A record level of new supply is on pace to deliver over the next four quarters. About 18,000 units are underway, and once completed, the market's inventory will expand by 5.3%. Despite the substantial pipeline, there is a disconnect between the demand for larger and more affordable units and new supply. Nearly all of the new developments underway are 4 & 5 Star buildings, and there is a potential under supply of two- and three bedroom units.


Downtown Phoenix leads all other sub markets for new construction, with more than 5,000 units underway. Downtown Phoenix's revitalization has made the sub market a top destination for millennials and multifamily development over the past few years. The concentration of new supply is near Roosevelt Row Art District. Trammell Crow Company's The Fillmore is the largest project under construction. The 4 Star, 609-unit apartment complex is located on Fifth Avenue and Fillmore Street and will deliver in 22Q4. Within a 1-mile radius of the project, about a dozen other luxury apartment buildings are under construction.


Aside from downtown's explosive growth, sub markets in the metro's Southeast region continue to receive high levels of new supply. Developers seek to capitalize on the area's concentration of affluent renters and employment growth, stimulated by several corporate expansions and relocations. About 25% of the units underway in the market are in Gilbert, Tempe, and Chandler. Banyan Residential is building two apartment communities in the Tempe sub market. Banyan Washington, a 4 Star, 223-unit mid-rise north of Tempe Town Lake, is slated to deliver in 21Q4. Construction is also underway on Banyan's Scottsdale Entrada in March.


The 736-unit apartment complex is part of a mixed-use development in an opportunity zone. Multifamily builders have returned to the West Valley and are attempting to keep up with the area's robust population growth. Single-family build-to-rent communities accounted for more than half of last year's multifamily deliveries in the sub market. Single-family rentals have the interior layout and backyard that a residential home provides, but they still perform like a multifamily rental and appear in CoStar analytics as such. Early this year, NexMetro began construction on two single-family rentals totaling 375 units: the Avilla Magnolia near South Mountain and Avilla Canyon in North Phoenix. Both communities are slated to deliver late next year.

Roughly 90% of units underway are 4 & 5 Star units tha

t command high rents, mainly due to developers' need to counteract the rising costs of developing land, entitling property, and construction. The unmet demand for affordable housing could present severe consequences since the dwindling supply of lower-tier rentals has put consistent upward pressure on rents. The lack of affordable supply has become a mounting concern, especially since the pandemic has had an out sized impact on lower-income renters.



Sales


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 in 2018 and 2019. Investment volume likely would have reached another all-time high if it weren't for the slowdown in 20Q2 during the onset of the pandemic. Sales volume rebounded in 20Q3 and reached a quarterly high in 20Q4. That momentum has carried into 2021.


The buyer pool is expanding. While local investors drive most of the volume, out-of-state interest has steadily grown. The diversification of industry has recaptured the interest of buyers who had once written off Phoenix as a risky boom-and-bust market. Private and institutional buyers drive transaction volume. REITs, which are typically more risk averse, have historically been inactive in the submarket, in large part due to perceived volatility and lack of core assets compared to Tier I markets.


Most trades occur in the $80,000/unit-$120,000/unit price range, but a meaningful percentage of deals have traded above $200,000/unit-$280,000/unit. The majority of sales are also for stabilized units, with occupancies above 96%, though many more properties sold in the past few quarters with slightly higher vacancies.


Over the past few years, price appreciation had outpaced substantial NOI growth, fueled by the highest rent growth in the country. As a result, cap rates have steadily compressed to around 5%. While yields have trailed the National Index by a nominal amount historically, the gap has increased in recent quarters to about 50-60 basis points. Despite the compression, investors still perceive Phoenix as a relative bargain compared to costly coastal markets; cap rates in Southern California are about 60 basis points lower. In addition to affordability, regulatory limitations on rent growth in markets, including California, Washington, and Oregon have caused yield-motivated buyers their shift their attention away from those areas to Phoenix. In the past quarter, about 30% of transactions sold to a California buyer. Washington-, Texas-, and Colorado-based buyers have also been exceptionally active.



NATIONAL APARTMENT REPORTS- Provided by Yardi Matrix

> 2020: February March June Aug Sept

> 2021: January


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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