As the multifamily market regains its footing this year from the coronavirus pandemic, Phoenix multifamily fundamentals rapidly strengthened, compressing vacancies to a historic low. Strong employment and household growth coupled with low levels of single-family inventory have swollen the renter pool, pushing Phoenix’s multifamily demand drivers to record heights. Net absorption outpaced net deliveries by more than 3,400 units in the first half of 2021, intensifying demand and giving operators strong pricing options.
The robust market fundamentals support the aggressive rent growth seen in the Phoenix market this year. According to a report from RealPage, Phoenix’s 3.4% effective rent increase in July was the second highest monthly hike in the nation. That monthly increase pushed average effective rents in Phoenix up 21.6% year-over-year, the largest annual apartment rent increase among the nations’ 50 largest apartment markets. That annual rent growth was an all-time record high for Phoenix, surpassing the last record set in 2000-2001. Despite such accelerated rent growth, the average effective asking rent in Phoenix stands at $1,483 per month, well below the major metro areas in California, Oregon and Washington.
The rapidly rising rents have not restrained demand as average metro-wide vacancy dropped to its lowest level in over ten years. The 4.8% average vacancy rate in July was 210 basis points lower than 12 months earlier and 150 basis points better than the second quarter of 2019. Demand likely won’t subside in the near term as low single-family home inventory and rapid price appreciation will keep the renter pool high and apartment vacancies low.
The dynamic performance of the Phoenix multifamily market has attracted a growing number of yield-driven investors, especially out-of-state buyers. Investors still perceive Phoenix as a relative bargain; cap rates in Southern California are about 60 basis points lower. In addition to affordability, regulatory limitations on rent growth in California, Washington, and Oregon have caused yield-motivated buyers to shift their attention to Phoenix. In the first quarter, approximately 30% of Phoenix transactions were sold to California buyers. Year-to-date, Real Capital Analytics reports the sale of 32,381 units for a sales volume of more than $7.3 billion, or $225,563 per unit, the third highest sales volume in the country behind Dallas and Atlanta. The surge in pricing has compressed average cap rates to 4.4%, the lowest ever seen in the Valley.
The Phoenix economy is among the best-performing in the country. Rapid population growth, a diversifying economy, relative affordability, and a business-friendly environment give the Valley a strong competitive advantage that is attracting more than 220 people to Phoenix every day. The continued economic and population expansion will keep the Phoenix apartment market a top national performer.
Director of Research
Written by John Fioramonti
Senior Business Writer
Kidder Mathews Research