It isn’t just
temperatures in the Phoenix metro that are scorching; the multifamily rental
market is hot as well. And vigorous demand is coming from both renters and
investors.
Investors are snapping up apartment properties and paying hefty prices. In the first half of 2019, buyers spent $3.72 billion on 94 Phoenix-area apartments, a 41.8 percent jump from the first half of 2018. Sales in the $50 million and greater range accelerated the most.
What are the driving factors behind strong demand?
Phoenix is the fastest-growing city in the U.S., according
to recently released data from the U.S. Census Bureau.
Phoenix saw an increase of 25,288 new residents between 2017 and 2018, topping
all other U.S. cities. One reason for that growth: Phoenix remains more affordable than many other large
U.S. metros. Many
people are flocking to the Valley from high-cost, high-tech cities like Los
Angeles and San Diego. And Phoenix boasts a thriving job market including a fast-growing,
high-paying tech sector.
Other booming industries include
bioscience/healthcare and financial services. In fact, the
Phoenix metro led the U.S. for new jobs created from May 2018 to May 2019 with
66,500 non-farm jobs, representing 3.2 percent job growth, according
to a new U.S. Bureau of Labor Statistics report.
Another 60,000 new jobs are forecast in 2019.
Robust
net migration and job production are fueling the increased demand for new housing
in Phoenix. This has led to a multifamily development boom. Developers delivered nearly 2,000 new units
in the first quarter of 2019, well ahead of the 2018 pace, and another
approximately 10,500 units are in the pipeline.
Despite new
construction, Phoenix’s rents remain among the fastest-growing in the U.S. The metro ranked in the top two for
the past several years for apartment rent growth. The average rent was $1,105 in the first quarter 2019, up 9.5
percent year over year. Phoenix is forecasted to be a top contender for U.S.
rent growth again in 2019. The market also boasts a healthy 94.7 percent occupancy
rate.
Meanwhile, Phoenix single-family home prices are expected to hit record highs in 2019 as home appreciation continues to climb.
New capital floods the apartment market
Historically, investors from California have pursued Phoenix apartment assets. But now there is a surge in new large investors from Colorado, Texas, Seattle and Portland. There is significantly more capital in the Phoenix-area market than multifamily properties to acquire, and most deals have upwards of 10-12 offers.
Another
factorfueling strong transaction
activity is the capital markets. The 10-year Treasury yield over the last 90
days has fallen dramatically, meaning financing for apartments is approximately
100 basis points lower than a year ago. Some of the largest players in the
market are both buying and selling assets, even though pricing has increased significantly.
This is because the debt they can obtain on new acquisitions is markedly
cheaper.
The median
price of Phoenix apartments pushed higher to start the year. In the first
quarter, it was $136,700 per unit, a 15 percent jump from 2018. The average cap
rate compressed by 5 percent and for some newer properties, it is as low as 4.5
percent.
New product emerging on the outskirts
Over the past five years, most new multifamily development has been infill
projects in East Valley, Scottsdale, Chandler, Tempe and downtown and midtown
Phoenix. However, a new emerging product type is low-density “Single-Family
Rental Communities” with 4,400 units stabilized, in lease-up or under
construction, and another 2,900 units in the pipeline.
These
“lock-and-leave” units are being developed on the city’s peripheral in
communities like Goodyear, Gilbert, Buckeye and Peoria, which historically,
have seen little new construction. Land is less expensive on the outskirts than
urban infill markets and single-level development costs are cheaper.
While urban
infill continues, costs continue to rise. Single-Family Rental Communities represent
an attractive property type that feels more like a community, with a backyard
and no one living above or below. Accordingly, they are drawing strong rents.
The two largest renter profiles for this new product are downsizing baby
boomers and the more experience-driven millennials.
Baby boomers
can live in a home similar to what they are accustomed to without the
maintenance headaches and having to tap into their retirement savings for a big
down payment. Meanwhile, millennials like the flexibility of a lease, yet want the
comfort of a home rather than a high-rise.
What does the future look like?
The Phoenix
multifamily market expects to continue to boast strong performance in 2019 and
2020. Experts anticipate continued rapid
rent growth, healthy absorption, strong development activity and an extended
run of low vacancy rates. The apartment investment market got off to a quick
start to 2019, which has paved the way for what will likely be another dynamic
year.