Multifamily rents and sales prices on the rise to start 2018

The Greater Phoenix multifamily market continued to strengthen in the first few months of 2018. Vacancy tightened and rents surged above $1,000 per month for the first time on record.

Renter demand for multifamily units is being fueled by healthy employment gains and new household formation. For the second consecutive year, Maricopa County recorded greater population growth than any other county in the United States, with the county’s total population expanding by approximately 74,000 residents in 2017.

This strong renter demand is driving the vacancy rate down near historically low levels. Vacancy ended the first quarter at just 5.4 percent, lower than one year ago even as nearly 9,000 units have been delivered during the past 12 months. Additional projects are in the pipeline and slated for delivery over the next 24 months.

Sales of apartment buildings slowed a bit from the pace recorded during the fourth quarter of last year, but investment conditions remain quite strong. Prices of units continue to rise, particularly in projects that have been completed during the current wave of new development.

Cap rates have compressed to approximately 5 percent, even as interest rates have begun to creep higher. It remains to be seen if the current cap rates can be sustained or if they will more closely track the upticks in financing rates going forward.

Key Takeaways:

  • The Greater Phoenix multifamily market got off to a hot start to 2018. Vacancy continues to retreat even as new inventory comes online, while both rents and sales prices are trending higher.
  • The local vacancy rate dipped by 50 basis points during the first quarter, falling to 5.4 percent. This is the second-lowest market vacancy in the past 20 years.
  • Renter demand is being sparked by population growth and employers expanding payrolls.
  • Asking rents gained 2.4 percent during the first quarter. Current asking rents are $1,018 per month, 7.3 percent higher than one year ago.
  • Investors are responding to the market’s tight conditions and persistent rent growth. The median price during the first quarter topped $120,000 per unit and cap rates have compressed to approximately 5 percent.

Outlook:

The strong start to the year continues to brighten the outlook for the Greater Phoenix multifamily market. Renter demand was particularly strong during the first quarter of this year, with net absorption up more than 33 percent from the same period one year ago.

Looking ahead, the second quarter is typically a period when conditions soften a bit, as some seasonal residents vacate for cooler climates. Net absorption was slightly positive in the second quarter of 2017, and if that trend repeats, it will be an indicator that a very active second half of the year is likely.

Strong property performance remains a catalyst for investment activity. Some of the increase in pricing is related to the mix of buildings changing hands—properties delivered in the past 10 years accounted for approximately 20 percent of all transactions during the first quarter—but heightened investor demand is also playing a role. Cap rates compressed to approximately 5 percent during the first quarter, even as interest rates rose. It is unclear how long this trend can be sustained, but a spike in cap rates appears unlikely in the months ahead.