Article originally posted on Commercial Executive Magazine on February 26, 2018.
Demand for Apartments Keeping Pace with New Construction
Phoenix rental rates are on the rise in the Greater Phoenix multifamily market, according to a report released by Colliers International in Greater Phoenix. Rates ticked higher as demand for apartments keeps pace with the growing inventory of units.
Asking rental rates rose 6.8 percent in 2017, posting a nearly identical gain to what was experienced in 2016. Rental rates inched up 0.7 percent during the fourth quarter, reaching $994 per month. More than half of the city’s submarkets have average asking rents above $1,000 per month, as opposed to one year ago when only one-third of the submarkets had hit that level. Class A developments are pushing the pace of new development, as their rental rates ended the year at an average of $1,631 per month.
The fourth quarter closed strong in 2017 as demand for apartments kept pace with new inventory coming online. Vacancy ticked up 20 basis points during the fourth quarter, reaching 5.9 percent. This vacancy is 10 basis points below year-end 2016. Vacancy has remained very tight since the second half of 2014, never ticking above 6.5 percent. More than 75 percent of the metropolitan area’s submarkets have vacancy rates within 100 basis points of their levels a year ago. This is impressive considering the active construction of new units.
Delivery of new projects peaked in 2017, demonstrating a pace that will likely slow during 2018. More than 8,800 new units came online in 2017, concentrated in Southeast Valley cities such as Gilbert and Tempe, as well as Central Phoenix/Encanto. Current construction of new units is spread across the metropolitan area. More than half the submarkets in Greater Phoenix have units under construction with activity increasing in West Valley areas of Peoria, Goodyear and Avondale. Multifamily permitting was consistent over the past three quarters, but permitting for the year was down eight percent from the 2016 total.
Rising rental rates have been pushing investment sales prices higher. The median price rose six percent in 2017, topping $110,000 per unit. Sales of apartment properties in 2017 dropped approximately five percent from 2016. Cap rates dropped slightly during fourth quarter, reflecting continued demand from investors for multifamily properties. Cap rates averaged 5.5 percent for all of 2017.
Colliers predicts the Greater Phoenix multifamily market will remain strong through 2018. Vacancy has fallen in four of the past five years, despite more than 32,000 new units being added to the inventory. Renter demand has more than offset the impact of growing inventory. This year, vacancy may inch higher, but rents are expected to continue increasing. Experts predict average asking rents will top $1,000 per month as early as first quarter 2018. The Federal Reserve will likely raise interest rates several times this year, but the Greater Phoenix investment market has managed to absorb interest rate hikes thus far.
View the report here.