Strong Apartment Performance and Low Interest Rates Draw Buyers to Phoenix

Apartment Construction Falls Short of Residential Demand; Average Effective Rent Skyrockets

Economic growth underpins strong apartment absorption.

Corporate expansions continue to drive in-migration as companies and job seekers seek refuge from the high costs found in other major metros. Allstate Insurance is building a new corporate campus that will provide employment for approximately 2,500 people. Other companies like Voya Financial and Nationwide Insurance have brought new jobs to Phoenix, supporting the second-highest net migration level in the country last year. Strong in-mi-gration, when paired with job growth at 3.3 percent over the past four quarters, should prove favorable for household formation in the market. The increased rental demand tightened vacancy and bolstered one of the nation’s best annual rent growths.

Construction keeps pace despite the tight labor market.

The Phoenix apartment market has consistently been outmatched by rental demand over the past several years despite high levels of construction. Develop-ment activity continues to rise in the Valley amid the challenges brought by the tight labor market. The two largest projects scheduled to finalize later this year are San Valencia in Chandler and Aura Watermark I in North Tempe near Arizona State. Each of these properties will add more than 360 apartments to the market’s inventory of Class A rental units. Aside from the metro’s largest project, Chandler also has three additional properties consisting of 570 units set to come online in 2019. If builders manage to adhere to schedules through the second half of the year, the metro will tally a total annual deposit of 8,250 new apartments.

Investment Trends

Trading velocity over the past 12 months ending in June increased by roughly 17 percent. Strong first half sales this year underpinned the annual growth.

Investor interest remains strong in the West Valley, where more than 4,000 units changed hands during the second quarter. Downtown Phoe-nix and North Phoenix also draw interest from investors for their strong inventories of Class B and C units.

Average cap rates have fallen moderately, though they held in the mid-to-upper-5 percent range as deal flow increased over the past 12 months. California investors remain active in Arizona as they chase first-year returns 100-200 basis points above California’s coastal metros.

Other out-of-state buyers have increased activity in the area as well. New York and Texas investors have already surpassed 2018 trade totals in the first half of this year as they chase the market’s strong yields.

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Report Provided by Marcus & Millichap Phoenix

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