Phoenix: A Multifamily Investment Hotspot
After a record-setting 2021, the Phoenix multifamily market continues to heat up based on key market trends.
Image by Kevin Ellis from Pixabay
Thanks to favorable demographic trends, a business-friendly environment, and robust job expansion, Greater Phoenix has become the poster child for economic growth in recent years. As a result, the metro’s commercial real estate market — from the industrial to the multifamily sector — is bustling with activity.
The Valley has seen some of the most significant investments over the past couple of years, including Taiwan Semiconductor Conductor Co.’s $12 billion investment in Deer Valley, Ariz., and Intel’s $20 billion expansion in Chandler, Ariz.
Nearly every submarket in Greater Phoenix has at least one major industrial development in the pipeline. During the first quarter of this year, the South Korea-based LG Energy Solution revealed plans for a $2.8 billion advanced manufacturing plant in Queen Creek., Ariz. The plant is slated for completion by 2024 and will add roughly 2,800 jobs to the region.
Large commercial investments and job growth generate significant demand for housing. The Phoenix multifamily market has become a hotspot for both investors and developers. The metro’s multifamily market experienced record-setting growth during 2021, with double-digit rent increases on an annual basis, and steady occupancy rates across the region. Nearly 9,500 units came online in 2021 through November, representing a new decade high, while investment volume rose by 31% over the previous peak, reaching $10.6 billion, according to a Yardi Matrix report.
Rapid Rent Growth Fuels Investment, Development in Phoenix Metro
Phoenix continued this momentum into the first quarter of 2022, a Northmarq report reveals. Investment velocity during the first three months of 2022 exceeded the pace established during the same period in 2021, while total dollar volume grew by roughly 40%. The average sale price reached $270,000 per unit, up 22% compared to last year. With rents still trending upward, investors are expected to remain bullish on Phoenix multifamily.
Following a wave of heightened deliveries in the second half of 2021, new completions slowed down in the first quarter of 2022, Northmarq reported. However, the development pipeline remains healthy, with some 29,000 under construction at the end of the first quarter, a 27% year-over-year increase. If developers remain on track, Northmarq forecasts that there will be around 14,500 units delivered by the end of the year.
Vacancy Pressures on the Phoenix Multifamily Market
Although demand for housing remained healthy in Phoenix, new deliveries outpaced absorption, putting upward pressure on vacancy rates. Overall vacancy rates rose 50 basis points in the first quarter, reaching 4.8%, while — year-over-year — vacancy was up by 30 basis points. Despite this uptick, the rate remains lower than the 5.2% average trending since the beginning of 2017.
The wave of new deliveries primarily put pressure on luxury properties. Class A vacancy stood at 5.9% at the end of the first quarter, up 130 basis points on over the year. However, this isn’t all bad news — upscale units in the market typically average between 6% and 7%, according to Northmarq.
Vacancy rates are still low enough to support continued rent increases. During the first quarter, rents grew by 2.5% and experienced a 27% uptick on a year-over-year basis. Continued population growth, driven in large part by residents relocating from expensive California markets, will likely continue to drive rent growth for the foreseeable future.
Related Questions
What are the benefits of investing in multifamily real estate in Phoenix?
Investing in multifamily real estate in Phoenix offers a number of benefits. The area has seen strong employment growth of 3.8%, with more than 60,000 jobs added between Q1 2018 and Q1 2019. This has kept housing demand strong, with nearly 3,000 units absorbed in 2019 and the vacancy rate dropping to 4.7%. Rent growth in Phoenix has also been high, increasing 8.1% over the last 12 months, with asking rents in some submarkets increasing as much as 10.4%.
Investment velocity in Phoenix during the first three months of 2022 exceeded the pace established during the same period in 2021, while total dollar volume grew by roughly 40%. The average sale price reached $270,000 per unit, up 22% compared to last year. With rents still trending upward, investors are expected to remain bullish on Phoenix multifamily.
The development pipeline in Phoenix also remains healthy, with some 29,000 units under construction at the end of the first quarter, a 27% year-over-year increase. If developers remain on track, Northmarq forecasts that there will be around 14,500 units delivered by the end of the year.
For investors looking to purchase an apartment building (or buildings) in the Phoenix area, there are a number of loan products available. These include Fannie Mae, Freddie Mac, FHA, and bridge loans. For more information on these loan products, please visit our website.
What are the risks associated with investing in multifamily real estate in Phoenix?
Investing in multifamily real estate in Phoenix carries some risks, including the potential for oversupply of units, rising interest rates, and a decrease in rental demand. Over the past year, the Phoenix area has seen a surge in new construction, with some 29,000 units under construction at the end of the first quarter of 2022, according to a Northmarq report. If developers remain on track, Northmarq forecasts that there will be around 14,500 units delivered by the end of the year. This could lead to an oversupply of units, which could drive down rental rates and occupancy levels. Additionally, rising interest rates could make it more difficult for investors to secure financing for their investments. Finally, a decrease in rental demand could lead to a decrease in rental income, making it more difficult for investors to turn a profit.
What are the current trends in multifamily real estate in Phoenix?
The Phoenix area is currently experiencing strong multifamily investment activity. According to a Northmarq report, investment velocity during the first three months of 2022 exceeded the pace established during the same period in 2021, while total dollar volume grew by roughly 40%. The average sale price reached $270,000 per unit, up 22% compared to last year. With rents still trending upward, investors are expected to remain bullish on Phoenix multifamily.
Following a wave of heightened deliveries in the second half of 2021, new completions slowed down in the first quarter of 2022, Northmarq reported. However, the development pipeline remains healthy, with some 29,000 units under construction at the end of the first quarter, a 27% year-over-year increase. If developers remain on track, Northmarq forecasts that there will be around 14,500 units delivered by the end of the year.
The Phoenix area is also experiencing strong employment growth, with more than 60,000 jobs added between Q1 2018 and Q1 2019. While unemployment did rise slightly over the same period, the vast increase in jobs has kept area housing demand strong. In fact, nearly 3,000 units were absorbed in 2019, while the vacancy rate dropped to 4.7%. Rent growth in Phoenix also remains high, having increased 8.1% over the last 12 months, with asking rents in some submarkets increasing as much as 10.4%.
What are the best neighborhoods to invest in multifamily real estate in Phoenix?
The best neighborhoods to invest in multifamily real estate in Phoenix depend on your investment goals. For example, if you're looking for high rent growth, you may want to consider areas such as North Central Phoenix, South Mountain, and Paradise Valley. These areas have seen some of the highest rent growth in the city, with rents increasing by 8.1% over the last 12 months. If you're looking for a more affordable option, you may want to consider areas such as Maryvale, South Phoenix, and West Phoenix, which have seen more moderate rent growth but still offer good investment opportunities.
When investing in multifamily real estate in Phoenix, it's important to consider the local market conditions. You'll want to research the area's job growth, construction activity, vacancy rates, and rent growth. You can find this information in reports from organizations such as Northmarq [1], which provide detailed insights into the Phoenix multifamily market. Additionally, you may want to consult with a local real estate financing advisor to discuss loan products that may be available to you.
What are the most important factors to consider when investing in multifamily real estate in Phoenix?
When investing in multifamily real estate in Phoenix, the most important factors to consider are employment growth, construction, rent growth, and vacancy rate.
Employment growth in Phoenix is strong, with more than 60,000 jobs added between Q1 2018 and Q1 2019. Construction is also high, with nearly 3,000 units absorbed in 2019. Rent growth in Phoenix is also high, having increased 8.1% over the last 12 months, with asking rents in some submarkets increasing as much as 10.4%. Finally, the vacancy rate dropped to 4.7%.
These factors all bode well for multifamily investors looking to purchase an apartment building (or buildings) in the area. Investment velocity during the first three months of 2022 exceeded the pace established during the same period in 2021, while total dollar volume grew by roughly 40%. The average sale price reached $270,000 per unit, up 22% compared to last year. With rents still trending upward, investors are expected to remain bullish on Phoenix multifamily.
It is also important to consider the development pipeline in Phoenix. Following a wave of heightened deliveries in the second half of 2021, new completions slowed down in the first quarter of 2022. However, the development pipeline remains healthy, with some 29,000 units under construction at the end of the first quarter, a 27% year-over-year increase. If developers remain on track, Northmarq forecasts that there will be around 14,500 units delivered by the end of the year.
For more information on multifamily financing, please visit our website.
What are the best financing options for investing in multifamily real estate in Phoenix?
The best financing options for investing in multifamily real estate in Phoenix are conventional apartment loans, Fannie Mae apartment financing, Freddie Mac apartment financing, FHA/HUD financing, mezzanine financing, CMBS loans, bridge loans, and apartment construction loans. These financing options are available for first-time multifamily investors and can help maximize returns.