July 25, 2024

Strong renter demand in Phoenix supporting multifamily market fundamentals

Renter demand remained elevated through the first half, which has resulted in rents and vacancy levels holding mostly steady to this point in 2024. Net absorption in the first two quarters of this year was up 13% compared to the same period in 2023. Net move-ins were particularly strong in the second quarter, when absorption reached nearly 4,300 units, closely tracking the number of units that came online during the period. Vacancy ticked lower in the second quarter, fueled by this continued stream of renters leasing units, although the rate is still higher than levels achieved one year ago. Rents were mostly flat in the second quarter, but nearly every submarket in the region features rents that have posted year-over-year declines. New units continue to come online, and while starts have begun to slow, 2024 is on track to be the most active year for new deliveries since the mid-1980s.

Investment activity gained momentum during the second quarter, but the number of properties changing hands remains considerably lower than the peak levels from just a few years ago. Sales velocity to this point in 2024 is ahead of the 2023 pace, with properties delivered in recent years accounting for approximately half of the total transactions year to date. While these newer properties are trading at the higher end of the market’s pricing range, per-unit pricing is down slightly from 2023 and about 25% lower than levels recorded in 2022. Cap rates appear to have stabilized between 5.5% and 5.75%, and the continued renter demand for units is supporting investor sentiment. A few Class B and Class C assets have traded, including some value-add properties that were acquired during the most recent surge in activity.

Looking ahead

An accelerated pace of development is forecast to place additional supply-side pressures on the Phoenix multifamily market during the second half of 2024. To this point, absorption has been elevated, nearly keeping pace with new additions to inventory. That trend is unlikely to continue in the second half, however, with the rate of job growth forecast to slow and deliveries poised to accelerate. These forces should combine to push area vacancies higher, and the increasingly competitive environment will likely result in modest rent declines. Despite the short-term challenges, the local rental market has outperformed expectations to this point and the outlook will brighten as the development pipeline thins and construction permitting and starts continue to slow.

The increased transaction activity recorded in recent months may carry over into the second half of the year. Cap rates have risen high enough to move some buyers off of the sidelines, and the anticipated decline in interest rates is beginning to emerge. The greatest supply of properties available for acquisition is expected to continue to be newer projects. Only about 10% of the properties that have been delivered since the beginning of 2023 have sold, with additional assets likely to transact in the coming quarters. Outside of newly constructed properties, activity has been modest, a trend that may spill over into 2025.