Phoenix’s Explosive Multifamily Market Spurring Vigorous Rent Growth, Investment Sales Activity

As more people continue moving from the West Coast to the red-hot Phoenix market, investment capital is aggressively following, primarily in the bustling multifamily and single-family build-to-rent sectors.

Phoenix is one of the busiest multifamily markets in the country fueled by robust population growth, strong employment and income growth, and a healthy, diverse economy. Arizona has recovered nearly all of the jobs lost during the height of the pandemic. Additionally, Phoenix has an extremely tight and competitive single-family housing market, which is pushing increasing rental demand.

Phoenix is also a hot spot for corporate relocations and company expansions including big tech. More technology companies are moving to Arizona, newly named the “Silicon Desert.” Corporate investments include Taiwan Semiconductor Manufacturing Co.’s $12 billion fabrication plant. Due to this expansive job growth, demand for apartments in Phoenix is outpacing supply and driving unprecedented rents.

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“As hundreds of thousands of people move to Phoenix, we’re undersupplied on new units in the market, which is leading to 27 percent rent growth year over year,” says Jesse Hudson, Senior Vice President of NorthMarq Investment Sales.

Arizona Governor Doug Ducey estimates the state will add more than 500,000 jobs over the next eight years, notes Brandon Harrington, NorthMarq’s Managing Director – Multifamily Debt and Equity.

“Phoenix has become a job magnet pushing population growth, which in turn, is fueling the drivers behind multifamily rents and occupancies,” Harrington says.

These healthy market fundamentals are attracting hungry investors to Phoenix, catapulting the market to a top spot for investment activity among major metro markets.

“Nobody imagined we would see the level of velocity and growth that we're seeing in the market in 2021, and capital continues to funnel into Phoenix,” says Hudson. “On any given opportunity, there's an endless amount of capital and/or buyers looking to transact in Phoenix. Phoenix is one of the top three markets nationwide where people want to put capital today.”

As investor demand intensifies and multifamily pricing increases, cap rates continue to tighten.

“It's hard for some new capital coming to Phoenix, especially because of how fast cap rates have compressed,” Harrington points out. “But if you've been in the market for several years and own assets here, you've already seen this and can underwrite with more aggressive assumptions. For new buyers, it takes a little bit of time to get comfortable.”

Although the current pace of rent growth is likely unsustainable, Phoenix will remain highly attractive.

“The entire buyer pool has wrapped their heads around the fact that rent growth can't continue at this pace, but even at 5, 7, 10 percent rent growth year over year, you can still make a lot of money because renting apartments is still a necessity, and Phoenix is very favorable,” Hudson says.

Most of the capital in Phoenix today is value add. These buyers can underwrite very aggressive assumptions -- whether it's exit cap rates, rent growth, or the premium they can get on renovated units, so “selling that to their equity base is easier than selling a coupon clipper with lower returns,” Hudson notes. “Seventy-five to 80 percent of our business this year will be in the value-add space.”