Prices spike as newer projects command top dollar

The Greater Phoenix multifamily market recorded a stronger second quarter than usual in 2018. Apartment vacancy typically edges higher in the second quarter in Phoenix, as seasonal residents move to cooler climates. This trend repeated in 2018, with the rate creeping up 50 basis points, but absorption was fairly strong. Net absorption during the second quarter topped 700 units, up more than 35 percent from the same period in 2017. This proved to be the strongest second quarter for net absorption since 2010.

With renter demand for units present in the market, the factor that drove vacancy higher during the second quarter was new development. More than 2,300 units were delivered during the second quarter, and year-to-date completions are up 18 percent from the first half of 2017. Despite the recent deliveries, the development pipeline is quite full, with more than 11,000 units currently under construction across 19 submarkets. New development will be a significant force in the market for at least the next 24 months.

Investment in the Greater Phoenix multifamily market was very strong during the second quarter, with activity surging and prices recording a steep rise. Some of the boost in pricing was due to the mix of properties that changed hands, particularly with some of the market’s newest complexes trading.

More than 20 percent of the properties that sold during the past three months were complexes that had been built since 2015. These projects traded at a median price of more than $230,000 per unit during the second quarter, compared to a median price of approximately $126,000 per unit for all other buildings sold during the quarter.

Key Takeaways:

  • The Greater Phoenix multifamily market had a mixed second quarter, but the overall trajectory is favorable. Vacancy ticked up in the summer months, but absorption was positive, rents spiked, and the investment market was quite active.
  • Vacancy rose 50 basis points during the second quarter, ending the period at 5.9 percent. The rate is unchanged from one year ago. While net absorption was positive during the second quarter, vacancy crept higher as new units came online.
  • Asking rents posted a second consecutive quarterly rent increase of more than 2 percent, reaching $1,046 per month. Year over year, asking rents have increased by 7.1 percent.
  • Sales of multifamily buildings picked up during the second quarter and prices recorded strong gains. Fueled by the sale of several newer complexes, the median price spiked to nearly $164,000 per unit in the second quarter. Cap rates averaged approximately 5.1 percent.

Outlook:

The outlook for the Greater Phoenix multifamily market remains bright, as continued renter demand is driving absorption of apartment units. The second quarter is typically the softest period in the Greater Phoenix multifamily market, before improvement is often recorded in the second half of the year. This trend is forecast to repeat in 2018. The local vacancy rate will likely inch a bit lower from its current level.

Construction will remain active, continuing a trend that has been underway for several years. Since 2014, more than 32,000 apartment units have been delivered in Greater Phoenix, increasing the total market inventory by 13 percent.

Property sales are showing no signs of slowing down. Activity accelerated in the second quarter and sales velocity in the first half of this year is closely tracking the pace established in 2017. Prices are on the rise, which will likely encourage more owners to list properties and capture gains.

The recent wave of new development is also providing an additional source of investment activity and will likely continue to change hands. More than two dozen properties built in the latest wave of development have sold since the beginning of 2016; collectively, the transactions of these properties have accounted for more than $1.4 billion in activity.