The Greater Phoenix multifamily market recorded mixed performance in the second quarter, but the short-term volatility should not mask the favorable long-term strengthening in local operating conditions. Since 2000, the Phoenix market has experienced one of the steepest declines in homeownership among major markets in the U.S., creating tens of thousands of additional renter households.
While demand for apartments has received a boost from changes in homeownership rates, the traditional sources of renter demand—population growth and employment growth—have slowed recently.
More substantial employment gains are forecast for the second half of this year, which should support a modest vacancy decline.
Continued strength in the Greater Phoenix multifamily market is fueling new construction. Following a lull in the development of new complexes from 2010-2012, apartment construction more than doubled last year and continues to accelerate in 2014. There are nearly 7,000 units currently under construction, up from 5,600 units in the first quarter. Development is concentrated in Scottsdale, Chandler and Tempe, cities where current vacancy rates average in the low-6 percent range.
Average asking rents have increased in each of the past three quarters and are up 2.6 percent from one year ago at $804 per month. This marks a new high for market rents in metro Phoenix and given the anticipated boost that will accompany the delivery of new units, rents will continue to rise in the quarters ahead. While rents are increasing gradually throughout Greater Phoenix, some submarkets are posting robust gains. Rents in the South Tempe submarket spiked 8.2 percent year over year, and areas such as South Scottsdale, North Paradise Valley and the Ahwatukee Foothills submarkets have recorded annual increases of more than 6 percent.
Multifamily vacancy in Greater Phoenix ticked up from 6.5 percent in the first quarter to 6.9 percent in the second quarter. The rise was expected, with new units coming online and the seasonal tapering off of renter demand that accompanies the summer months. Despite the recent rise, vacancy has fallen 90 basis points during the past 12 months and average vacancy over the past year is at its lowest point since 2006.
Approximately 80 percent of the submarkets in Greater Phoenix have recorded vacancy improvements over the past year, led by North Phoenix area submarkets. Even in Chandler, where vacancy rose 90 basis points in the second quarter to a still-tight 6.2 percent, the recent increase is entirely the result of an influx in new units. Year to date, approximately 800 units have been delivered in the submarket, driven in part by healthy demand. Since 2013, renters have absorbed approximately 700 units in the Chandler submarket.
After slowing considerably at the beginning of the year, sales activity of multifamily properties surged during the second quarter. Year to date, sales velocity is up approximately 25 percent when compared to the first half of 2013. Early indications suggest activity levels in the third quarter should at least maintain the pace established over the past three months.
The median price ticked up approximately 4 percent in the second quarter, reaching $52,000 per unit. Prices vary greatly, however, with sales of assets at both the low-end and high-end of the spectrum accounting for significant shares of the total activity. More than 20 percent of the properties sold during the second quarter traded for more than $100,000 per unit. Also in the second quarter, approximately 15 percent of buildings that changed hands traded for less than $25,000 per unit. Average cap rates held steady at approximately 6 percent.