Multifamily Absorption Gains Momentum While Deliveries Slow in Phoenix

The Phoenix multifamily market began 2025 on a healthy note, with quarterly absorption totals outpacing deliveries for the first time in two years, driving vacancies lower and allowing for a modest uptick in rents. Supply growth has been the prevailing theme in the local multifamily market in recent years, but the development pipeline is thinning, with deliveries peaking in 2024. This year will mark the conclusion of a six-year period when approximately 100,000 units of new inventory were delivered to the market. Renter demand has remained healthy in recent periods, including a first quarter where net absorption totaled more than 3,750 units, about 10 percent higher than the total from one year earlier. During the past 12 months, absorption has totaled nearly 16,000 units, 28% higher than the annual total from 12 months ago. The continued strength in demand has kept vacancy in a tight range, with the rate ending the first quarter down 10 basis points year over year.

Investment activity in the Phoenix multifamily market was limited to a handful of transactions in the first quarter, following fairly steady transaction levels during the second half of last year. In the deals that did close at the start of 2025, there was an increase in older Class B and Class C properties, after the market was fueled by sales of new Class A communities in recent years. While the mix of assets being sold has varied and interest rates have fluctuated, cap rates have remained fairly steady in recent quarters, averaging approximately 5.25%. There has been a wider range in per-unit prices, with newer builds trading at approximately $340,000 per unit, while Class C properties have sold for between $155,000 per unit and $180,000 per unit in most cases.

Looking ahead

The Phoenix multifamily market has continued to post healthy operational fundamentals in recent periods despite a slowing pace of economic growth and ongoing development that has increased competition for operators. These trends are expected to persist through the remainder of 2025, as developers move properties through the development pipeline. Employers are expected to add workers in greater numbers in the coming quarters, after losses in a few sectors dragged on growth totals in recent months. Longer term, the outlook brightens as the pace of new development is expected to slow from 2026 to at least 2028, which should result in vacancy rates ultimately returning closer to 5%.

The slow start to the year in the investment market is expected to reverse course in the coming months. The trend has already begun to emerge, with a flurry of sales closing in the first few weeks of the second quarter. More multifamily properties traded in April than in the entire first quarter, setting the stage for continued investment activity throughout the remainder of this year. The types of properties that are selling is also evolving. In 2023 and 2024, the investment market was fueled by newly completed properties being sold either during lease-up or at stabilization. These assets should continue to sell in the coming quarters, but there will also be properties that traded at the height of the market selling again at a time where operating conditions are softer and financing costs are higher.

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