Phoenix apartment market remains red-hot; fueling influx of new capital, spike in transactions

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.