February 14, 2025

Multifamily Absorption Surges in Phoenix, but Does Not Keep Pace with Deliveries

Q4 2024

The Greater Phoenix multifamily market softened somewhat in the fourth quarter, but property performance for the full year was better than was originally forecast. Rents inched lower, particularly in the second half of the year, but vacancy rates ended 2024 at an identical level to one year earlier. This most recent year has been a period of heightened supply and demand growth. On the supply side, developers delivered more than 22,400 units in 2024, bringing the total new deliveries since the beginning of 2021 to approximately 67,000 units, or about 20 percent of the previous inventory. By comparison, employment in the region has expanded by 15 percent during this same time period. Rentals are proving to be a popular choice as the local economy expands and new households are formed. In 2024, net absorption reached 15,600 units, an all-time high and the third time in the past four years where absorption totaled more than 12,000 units.

While developers were active in bringing new projects online and net absorption reached a new high, the investment market maintained a slower pace. Transaction counts in 2024 were up only slightly compared to year-earlier levels, and fewer properties sold in the fourth quarter than during the third quarter. Some of the recent slowing is likely explained by rising interest rates in the second half of the fourth quarter. Many of the assets that are selling are properties that have been delivered in the past few years. These newer developments have changed hands at a median price of $288,000 per unit, down from more than $390,000 per unit in 2022. The most pronounced declines in sales velocity have been recorded in Class B and Class C properties, where recent transaction volumes are down approximately 75 percent from 2022 levels. The influence of new properties in the transaction mix has kept cap rates low, averaging between 5.25 percent and 5.5 percent at the end of this year.

Looking ahead

In the year ahead, operating conditions in the Greater Phoenix multifamily market will likely soften somewhat, as the cumulative impact of elevated delivery totals will create supply-side pressures that drag on property performance. Not all geographies will be impacted equally however, as some of the submarkets with the tightest vacancies also are forecast to receive minimal increases to existing inventories in 2025. Submarkets including the Ahwatukee Foothills and South Tempe have vacancy rates in the low-6 percent range and have not been impacted significantly by new construction. To this point in the cycle, renter demand has been strong enough to offset new supply growth in North Scottsdale, South Scottsdale, and North Paradise Valley, but the pace of completions is forecast to accelerate in these areas, potentially creating conditions that could create a more competitive leasing environment for the next few years.

The local investment market is expected to gain some momentum in 2025. Newly constructed developments will likely lead the way once again from an investment standpoint, with buyers targeting assets either during lease-up or at stabilization. To this point, distress sales have accounted for a small share of the total number of transactions, as vacancy and rent conditions have outperformed expectations, supporting operational performance. There may be an increase in the number of distressed transactions in 2025, particularly if interest rates remain elevated and competition from new supply causes rents to dip further. Still, population gains and employment growth are strong enough to support renter demand throughout much of the market. Cap rates have remained steady in the low- to mid-5 percent range, although these averages reflect the premiums typically associated with new Class A construction.