October 28, 2024

Multifamily Investment Activity in Phoenix Ticks Higher but Remains Well Below Prior Peak

Q3 2024

Vacancy in the Greater Phoenix multifamily market continues to come in lower than expected. The rate ended the third quarter at 7.1 percent, just 10 basis points higher than the figure at midyear; vacancy has also increased only 10 basis points year over year. While vacancies are lower than originally forecast, they are about 130 basis points higher than the market’s 10-year average and are expected to trend higher during the next few quarters. Renter demand is elevated, and absorption has totaled nearly 25,000 units since the beginning of 2023. Still, move-ins are not expected to keep pace with completions. This quarter marked the first time in more than a year where there were fewer than 40,000 units under construction, but deliveries will remain elevated into 2026.

Investment activity has been accelerating gradually to this point in 2024. Transaction counts in the third quarter reached their highest total since the end of 2022, and sales velocity year to date is up more than 20 percent when compared to levels from the same period in 2023. While newer assets account for nearly half of the total properties that have sold year to date, a few more older Class B and Class C communities traded in the third quarter. With investors acquiring a greater mix of assets than in earlier periods, cap rates have begun to trade within a wider range. Cap rates start at approximately 5.25 percent but have exceeded 6 percent in some recent transactions.

Looking ahead

Operating conditions are expected to soften somewhat in the coming quarters across the Phoenix multifamily market. While properties are expected to continue to record net move-ins, supply growth is forecast to exceed absorption, putting upward pressure on vacancies. This supply-demand imbalance is expected to persist throughout the remainder of this year and into 2025. Coming into 2024, the greatest uncertainty in the market surrounded rents. To this point, rents have trended lower but at a moderate pace. Annual rent declines have averaged around 2 percent since the beginning of 2023, and similar decreases are likely into 2025. The market will eventually work through the pressures brought about by the new supply. The number of units under construction has come down from peak levels and multifamily permitting is slowing as developers proceed more cautiously in the current environment.

While recent transaction volumes still lag peak levels by more than 65 percent, the local investment market has gained some modest momentum in recent quarters, a trend that is expected to be sustained through the remainder of this year and into 2025. Earlier this year, transactions were made up almost entirely of newer properties and few investors were considering purchases of older assets, anticipating that prices would creep lower as rising vacancies and operational costs pressured existing owners. That pattern has begun to shift, and some buyers who had remained on the sidelines are returning in small numbers. Interest rates could influence the velocity in the investment market. Most forecasts call for interest rate cuts that could spill over into lower borrowing costs for multifamily acquisitions. While financing costs may inch lower, cap rates will likely remain near recent ranges.